CHAPTER
1
The Scope and
Method of Economics
Appendix: How to Read and Understand Graphs
Prepared by: Fernando Quijano
and Yvonn Quijano
© 2004 Prentice Hall Business Publishing
Principles of Economics, 7/e
Karl Case, Ray Fair
C H A P T E R 1: The Scope and Method of Economics
The Study of Economics
• Economics is the study of
how individuals and societies
choose to use the scarce
resources that nature and
previous generations have
provided.
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C H A P T E R 1: The Scope and Method of Economics
Why Study Economics?
• An important reason for studying
economics is to learn a way of
thinking.
• Three fundamental concepts:
• Opportunity cost
• Marginalism, and
• Efficient markets
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C H A P T E R 1: The Scope and Method of Economics
Opportunity Cost
• Opportunity cost is the best
alternative that we forgo, or give up,
when we make a choice or a
decision.
• Nearly all decisions involve tradeoffs.
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C H A P T E R 1: The Scope and Method of Economics
Marginalism
• In weigh the costs and
benefits of a decision, it is
important to weigh only the
costs and benefits that arise
from the decision.
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C H A P T E R 1: The Scope and Method of Economics
Marginalism
• For example, when a firm decides
whether to produce additional output, it
considers only the additional (or
marginal) cost, not the sunk cost.
• Sunk costs are costs that cannot be
avoided, regardless of what is done in the
future, because they have already been
incurred.
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C H A P T E R 1: The Scope and Method of Economics
Efficient Markets
• An efficient market is one in which
profit opportunities are eliminated almost
instantaneously.
• There is no such a free lunch! Profit
opportunities are rare because, at any
one time, there are many people
searching for them.
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C H A P T E R 1: The Scope and Method of Economics
More Reasons to Study Economics
• The study of economics is an essential
part of the study of society.
• Economic decisions often have
enormous consequences.
• During the Industrial Revolution, new
manufacturing technologies and improved
transportation gave rise to the modern
factory system.
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C H A P T E R 1: The Scope and Method of Economics
More Reasons to Study Economics
• An understanding of economics is
essential to an understanding of
global affairs.
• Voting decisions also require a
basic understanding of economics.
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C H A P T E R 1: The Scope and Method of Economics
The Scope of Economics
• Microeconomics is the
branch of economics that
examines the behavior of
individual decision-making
units—that is, business firms
and households.
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C H A P T E R 1: The Scope and Method of Economics
The Scope of Economics
• Macroeconomics is the branch
of economics that examines the
behavior of economic
aggregates— income, output,
employment, and so on—on a
national scale.
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C H A P T E R 1: The Scope and Method of Economics
The Scope of Economics
Examples of microeconomic and macroeconomic concerns
Microeconomics
Macroeconomics
Production
Prices
Income
Employment
Production/Output
in Individual
Industries and
Businesses
Price of Individual
Goods and
Services
Distribution of
Income and Wealth
Wages in the auto
industry
Minimum wages
Executive salaries
Poverty
Employment by
Individual
Businesses &
Industries
Jobs in the steel
industry
Number of
employees in a firm
National Income
Total wages and
salaries
Employment and
Unemployment in
the Economy
Total corporate
profits
Total number of
jobs
Unemployment
rate
How much steel
How many offices
How many cars
Price of medical
care
Price of gasoline
Food prices
Apartment rents
National
Production/Output
Aggregate Price
Level
Total Industrial
Output
Gross Domestic
Product
Growth of Output
Consumer prices
Producer Prices
Rate of Inflation
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C H A P T E R 1: The Scope and Method of Economics
The Method of Economics
• Positive economics studies
economic behavior without
making judgments.It
describes what exists and
how it works.
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C H A P T E R 1: The Scope and Method of Economics
The Method of Economics
• Normative economics, also
called policy economics,
analyzes outcomes of
economic behavior, evaluates
them as good or bad, and may
prescribe courses of action.
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C H A P T E R 1: The Scope and Method of Economics
The Method of Economics
• Positive economics includes:
• Descriptive economics, which involves
the compilation of data that describe
phenomena and facts.
• Economic theory, which involves building
models of behavior.
• An economic theory is a general statement of
cause and effect, action and reaction.
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C H A P T E R 1: The Scope and Method of Economics
Theories and Models
• Theories involve models, and
models involve variables.
• A model is a formal statement of a
theory. Models are descriptions of
the relationship between two or
more variables.
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C H A P T E R 1: The Scope and Method of Economics
Theories and Models
• Ockham’s razor is the
principle that irrelevant detail
should be cut away. Models
are simplifications, not
complications, of reality.
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C H A P T E R 1: The Scope and Method of Economics
Theories and Models
• A variable is a measure that can change
from observation to observation.
• The ceteris paribus device is part of the
process of abstraction.
• Using the ceteris paribus, or all else equal,
assumption, economists study the relationship
between two variables while the values of other
variables remain constant.
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C H A P T E R 1: The Scope and Method of Economics
The Method of Economics
• Empirical economics refers to the
collection and use of data to test
economic theories.
• Many data sets are available to
facilitate economic research. They are
collected by both government
agencies and private companies,
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C H A P T E R 1: The Scope and Method of Economics
Economic Policy
Criteria for judging economic outcomes:
• Efficiency, or allocative efficiency.
An efficient economy is one that
produces what people want at the
least possible cost.
• Equity, or fairness of economic
outcomes.
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C H A P T E R 1: The Scope and Method of Economics
Economic Policy
Criteria for judging economic outcomes:
• Economic growth, or an increase in the
total output of an economy.
• Economic stability, or the condition in
which output is steady or growing, with
low inflation and full employment of
resources.
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C H A P T E R 1: The Scope and Method of Economics
Review Terms and Concepts
ceteris paribus
macroeconomics
descriptive economics
microeconomics
economic growth
model
economic theory
normative economics
economics
opportunity cost
efficiency
positive economics
efficient market
stability
empirical economics
sunk costs
equity
Variable
fallacy of composition
Industrial Revolution
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C H A P T E R 1: The Scope and Method of Economics
Appendix:
How to Read and Understand Graphs
• A graph is a twodimensional
representation of a
set of numbers or
data.
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• A time series
graph shows
how a single
variable changes
over time.
Total Disposable Personal Income in
the United States: 1975-2002 (in
billions of dollars)
Total disposable personal income
C H A P T E R 1: The Scope and Method of Economics
Appendix:
How to Read and Understand Graphs
8000
7500
7000
6500
6000
5500
5000
4500
4000
3500
3000
2500
2000
1500
1000
1975
1980
1985
1990
1995
2000
Year
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Principles of Economics, 7/e
Karl Case, Ray Fair
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C H A P T E R 1: The Scope and Method of Economics
Appendix:
How to Read and Understand Graphs
• The Cartesian coordinate system is the
most common method of showing the
relationship between two variables.
• The horizontal line is
the X-axis and the
vertical line the Y-axis.
The point at which the
horizontal and vertical
axes intersect is called
the origin.
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Karl Case, Ray Fair
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C H A P T E R 1: The Scope and Method of Economics
Appendix:
How to Read and Understand Graphs
© 2004 Prentice Hall Business Publishing
• The point at which the
line intersects the Y-axis
(point a) is called the Yintercept.
• The Y-intercept, is the
value of Y when X = 0.
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C H A P T E R 1: The Scope and Method of Economics
Appendix:
How to Read and Understand Graphs
© 2004 Prentice Hall Business Publishing
• The slope of the line
indicates whether the
relationship between
the variables is positive
or negative.
• The slope of the line is
computed as follows:
Y
Y1  Y0
b=

 X X1  X 0
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C H A P T E R 1: The Scope and Method of Economics
Appendix:
How to Read and Understand Graphs
© 2004 Prentice Hall Business Publishing
• This line slopes
upward, indicating that
there seems to be a
positive relationship
between income and
spending.
• Points A and B, above
the 45° line, show that
consumption can be
greater than income.
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C H A P T E R 1: The Scope and Method of Economics
Appendix:
How to Read and Understand Graphs
An upward-sloping
line describes a
positive relationship
between X and Y.
© 2004 Prentice Hall Business Publishing
A downward-sloping
line describes a
negative relationship
between X and Y.
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C H A P T E R 1: The Scope and Method of Economics
Appendix:
How to Read and Understand Graphs
7
b 
  0.7
10
5
b
 0.5
10
0
b
0
10
© 2004 Prentice Hall Business Publishing
10
b

0
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C H A P T E R 1: The Scope and Method of Economics
Appendix:
How to Read and Understand Graphs
© 2004 Prentice Hall Business Publishing
Principles of Economics, 7/e
Karl Case, Ray Fair
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C H A P T E R 1: The Scope and Method of Economics
Appendix:
How to Read and Understand Graphs
Cartesian coordinate
system
slope
time series graph
graph
X-axis
negative relationship
origin
Y-axis
Y-intercept
positive relationship
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Principles of Economics, 7/e
Karl Case, Ray Fair
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C H A P T E R 1: The Scope and Method of Economics
Assignment 1 :
Give a short answer or definition of concepts below :
1.
2.
3.
What does it mean by economics ?
What is the important reason for studying economics ?
List and briefly explain three fundamental concepts in studying
economics !
4. What is opportunity cost ?
5. What is shunk cost ?
6. Explain briefly what an efficient market is !
7. What are three examples of consequences on society drive from
economics decisions !
8. Explain what is the different between microeconomics and
macroeconomics !
9. Explain briefly the method of economics, such as positive economics
as well as normative economics.
10. What are the criteria for judging economic policy ?
Due : Sept 25, 2009 before the begining of class..
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Principles of Economics, 7/e
Karl Case, Ray Fair
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