What is Economics?
 Economics is a study of how people go about using
scarce (or limited) resources to satisfy their
unlimited wants.
 Economics is concerned with the process of making
choices in production, in consumption (and saving),
and in investment under the conditions of scarcity.
 Economics is concerned with the efficiency in the use
of scarce resources.
 Economics is concerned with the efficient use of
scarce resources to achieve maximum satisfaction of
human material wants.
Who Should Study Economics?
 We are all economic beings. Wearing different hats, as
consumers, savers, producers (workers), investors, and
entrepreneurs we all make economic choices.
 Learning how to economize was probably a key to our
survival as a species.
 As consumers, owners of economic resources, and/or
producers, we are active participants in a
socioeconomic system characterized by a set of rules,
social norms, and traditions.
 Understanding the working of the economy and our
own role in it helps us function more effectively (and
successfully) as individuals and, at the same time, it
makes us better citizens.
 Often the success of a functioning democracy highly
depends on how well informed its citizens are.
The Basic Economic Problem
“SCARCITY”
 All economic resources are scarce.
 We individually and collectively (as a society)
make our economic choices under the conditions
of scarcity.
 Every economic choice entails an “opportunity
cost.”
 The “opportunity cost” of an economic choices is
the vale (or cost) of the next best (forgone)
option.
Some economic questions
 Is this a good time to buy a home?
 Is this a good time to buy a new car?
 Should I sign up for an economics course?
 Is a tax cut a good economic policy at this time?
 Is it a good idea to just get rid of the income tax?
 Is free trade good for the country?
 Should we privatize the Social Security
retirement program?
 Should the government be responsible for
providing health care for all citizens?
 Should the government pay for or subsidize
scientific research?
The Two Branches of Economics
Microeconomics: A study of the
behavior of individual economic units:
consumers, firms, and government
Macroeconomics: A study of the
economy as whole or a study of economic
aggregates: GDP and GDP growth,
inflation, unemployment
The Methodology of Economics
An economic theory: A generalized statement
of a proven economic fact constructed through
induction, deduction or a combination of both
An economic model: An abstract (simplified)
representation of an economic relationship
The need for abstraction
Watch for pitfalls!
Tools of analysis
USE AND MISUSE OF
GRAPHS
Graphs used in economic analysis
Perils in the interpretation of graphs
Graphs Used In Economic
Two-Variable Diagrams
Variable = something measured by a number
Examples: price and quantity
View two variables together to see if they
exhibit a relationship.
TWO VARIABLES IN A TABLE
Price and Quantity of Demand for
Natural Gas in St. Louis
Price (per thousand cubic
feet)
Quantity Demanded
(billions of cubic feet per
year)
$2 $3
$4
$5
$6
120 80
56
38
20
Copyright  2000 by Harcourt, Inc. All rights reserved.
TWO VARIABLES IN A GRAPH
A Demand Curve for Natural Gas in St. Louis
6
6
5
5
4
4
3 P
a
b
2
Price
Price
D
P
3
a
b
2
D
1
1
Q
Q
0 20 40 60 80 100120140
0 20 40 60 80 100120140
Quantity
Copyright  2000 by Harcourt, Inc. All rights reserved.
Quantity
Graphs Used In Economic Analysis
The Slope of a Straight Line
Slope = ratio of vertical change to horizonta
change
Rise/run
Measure of steepness of the line
Graphs Used In Economic Analysis
The Slope of a Straight Line
Positive Slope = two variables rise and
fall
together
The two variables move in the same
direction.
EXAMPLE OF POSITIVE SLOPE
Y
0
Copyright  2000 by Harcourt, Inc. All rights reserved.
X
Ch 2: USE AND MISUSE OF GRAPHS
Graphs Used In Economic Analysis
The Slope of a Straight Line
Negative slope = one variable rises
while
the other variable falls
The two variables move in opposite
directions.
EXAMPLE OF NEGATIVE SLOPE
Y
0
X
Copyright  2000 by Harcourt, Inc. All rights reserved.
The Slope
of a
LineAnalysis
Graphs
Used
InStraight
Economic
Zero slope = the variable on the
horizontal axis can be any value while
the variable on the vertical
axis is fixed
Horizontal line
EXAMPLE OF ZERO SLOPE
Y
0
X
Copyright  2000 by Harcourt, Inc. All rights reserved.
Graphs Used In Economic Analysis
The Slope of a Straight Line
Infinite slope = the variable on the
vertical axis can be any value
while the variable on
the
horizontal axis is
fixed
Vertical line
EXAMPLE OF INFINITE SLOPE
Y
0
X
Copyright  2000 by Harcourt, Inc. All rights reserved.
Graphs Used In Economic Analysis
The Slope of a Straight Line
Slope is constant along a straight line.
Slope can be measured between any two
points on one axis and the corresponding
two points on the other axis.
HOW TO MEASURE SLOPE
Y
Slope = 3/10
11
C
8
B
A
0
3
13
Copyright  2000 by Harcourt, Inc. All rights reserved.
X
Graphs Used In Economic Analysis
The Slope of a Curved Line
Slope changes from point to point on a
curved line.
A curved line that is bowed toward the
origin has a negative slope.
The two variables change in opposite
directions.
NEGATIVE SLOPE IN CURVED LINES
Y
X
0
Copyright  2000 by Harcourt, Inc. All rights reserved.
Ch 2: USE AND MISUSE OF GRAPHS
Graphs Used In Economic Analysis
The Slope of a Curved Line
A curved line that is bowed away from
the origin has a positive slope.
The two variables change in the same
direction.
POSITIVE SLOPE IN CURVED LINES
Y
X
0
Copyright  2000 by Harcourt, Inc. All rights reserved.
Graphs Used In Economic Analysis
The Slope of a Curved Line
A curved can have both a positive and
negative slope depending on where on
the curve is measured.
BEHAVIOR OF SLOPES IN CURVED GRAPHS
Y
Y
Negative
slope
0
Positive
slope
X
0
Copyright  2000 by Harcourt, Inc. All rights reserved.
X
BEHAVIOR OF SLOPES IN CURVED GRAPHS
Y
Y
Negative
slope
Positive
slope
Negative
slope
Positive
slope
0
X
0
Copyright  2000 by Harcourt, Inc. All rights reserved.
X
Graphs Used In Economic Analysis
The Slope of a Curved Line
The slope at a point on a curved-line is
measured by a line tangent to that
point.
MEASUREMENT OF SLOPE
AT A POINT ON A CURVED LINE
Y
r
8
D
7
6
5
R
t
F
C
E
4
G
T
3
r
M
2
1
0
A
t
B
1
2
3
4
5
6
7
Copyright  2000 by Harcourt, Inc. All rights reserved.
8
9
10
X
RAYS THROUGH THE ORIGIN
Slope = +2
Slope = +1
Slope = +1/2
8
4
2
0
4
Copyright  2000 by Harcourt, Inc. All rights reserved.
RAYS THROUGH THE ORIGIN
Y
Rays with a slope of 1
are equally far from
both axes at all points
5
3
0
3
5
Copyright  2000 by Harcourt, Inc. All rights reserved.
X
AN ECONOMIC CONTOUR MAP
Land (Acres)
A
100
C
D
Q=30
Q = 20
B
20
Q=10
0
2
5 6
8
Fertilizer
Copyright  2000 by Harcourt, Inc. All rights reserved.
Time-Series Graphs
 Depict changes in a variable over time.
 Examples
 Wages per hour
 Investment per month
 Gross Domestic Product (GDP) per year
NOMINAL GDP: AN ECONOMIC TIME-SERIES
Billions of Dollars
8,000
Nominal GDP
6,000
4,000
2,000
0
'60
'65
'70
'75
'80
'85
Year
Copyright  2000 by Harcourt, Inc. All rights reserved.
'90
'95
2000
Graphs
Misinterpreting Time-Series Graphs
Rising prices or population
NOMINAL, REAL, AND PER CAPITA GDP
8,000
8,000
7,000
7,000
6,000
6,000
Per-capita Real GDP
(right scale)
5,000
5,000
4,000
4,000
3,000
3,000
Real GDP
(left scale)
2,000
1,000
1,000
0
2,000
'60
'65
'70
'75
'80
'85
'90
Copyright  2000 by Harcourt, Inc. All rights reserved.
'95
2000
Year
Dollars per Year
Billions of Dollars per Year
Nominal GDP (left scale)
Perils in the Interpretation of Graphs
Misinterpreting Time-Series Graphs
Choice of beginning and ending periods
STOCK PRICES, 1966 TO 1982
Dow Jones Industrial Average ($'83)
3,500
3,000
2,500
2,000
1,500
1,000
500
0
'66
'68
'70
'72
'74
'76
Year
Copyright  2000 by Harcourt, Inc. All rights reserved.
'78
'80
'82
STOCK PRICES CORRECTED FOR INFLATION,
1925-1999
Dow Jones Industrial Average ($'88)
5,000
4,500
4,000
3,500
Kennedy
expansion
3,000
2,500
2,000
1,500
'29 crash
World
War II
'87
crash
1,000
500
Great Depression
0
'30 '40 '50 '60 '70
Year
Copyright  2000 by Harcourt, Inc. All rights reserved.
Reagan
election
'80 '90
'99
Perils in the Interpretation of Graphs
Misinterpreting Time-Series Graphs
Omission of the origin
Perils in the Interpretation of Graphs
Misinterpreting Time-Series Graphs
Choice of units
1,100
1,050
1,010
1,000
0
Jan
(a)
Feb
Pounds of Beef Sold per Month
Hamburgers Sold per Month
SLOPE DEPENDS UPON
UNITS OF MEASUREMENT
280
270
260
250
0
Copyright  2000 by Harcourt, Inc. All rights reserved.
Jan
(b)
Feb
of Graphs
Summary of Reasons for
Misinterpreting Time-Series Graphs
Rising prices or population
Choice of beginning and ending periods
Omission of the origin
Choice of units
Opportunity Cost:
A demonstration
The assumptions:
An economy operating under:
Given resources
Given technology
Full employment
Full production
Producing two goods
Figure 1: The Production Possibilities Frontier
Figure 2: Increasing Opportunity Cost
of Saving a Life
Figure 3: Technical Inefficiency
Figure 4: The U.S. and the U.S.S.R.
in World War II
Table 1: Time Requirements for Berries and Fish
Maryanne
Gilligan
1 Quart of Berries
1 hour
1½ hours
1 Fish
1 hour
3 hours
Table 2: Production Under Self-Sufficiency
Maryanne
Gilligan
Total Island
Quarts of Berries
5
2
7
Number of Fish
7
3
10
Table 3: Production with Specialization
Maryanne
Gilligan
Total Island
Quarts of Berries
0
8
8
Number of Fish
12
0
12
Draw a line representing the relationship described in each of the
following statements:
Note: Be sure to identify and label your axes.
1. As the weather gets warmer people eat more ice cream.
2. As the weather gets warmer people drink less coffee.
3. A higher price of gasoline make people use more public
transportation.
4. Children tend to grow taller with age but at a certain age
they stop growing.
5. As a result of lower interest rates real estate prices have
increased.