Chapter 1 – Introduction to Economics
ECONOMICS
THEORY AND PRACTICE
Seventh Edition
Patrick J. Welch
&
St. Louis University
Gerry F. Welch
St. Louis Community College
at Meramec
PowerPoint Presentation by:
Dr. Ray Everett
Pima Community College
Copyright © 2004 John Wiley & Sons, Inc. All rights reserved.
Introduction to Economics
Contents
Economics & Scarcity
Efficiency & Equity
Factors of Production
Economic Theory & Policy
Tools of the Economist
Scarcity, Model Building, & Graphs
Macroeconomics & Microeconomics
Graphing (Chapter 1 Appendix)
Introduction to Economics
Chapter Objectives
• To define economics and introduce the scarcity problem, which
underlies economics.
• To understand the relationship between scarcity and choice.
• To define opportunity cost.
• To explore how efficiency and equity are related to the problem of
scarcity.
• To identify four factors of production and the income return to each
type of factor.
• To differentiate between economic theory and economy policy.
• To introduce the tools economists use to express theories and
policies.
• To use the production possibilities model to illustrate and explain the
basic problem of scarcity.
• To differentiate between macroeconomics and microeconomics.
• To explain how to construct a graph and interpret the illustrated
relationship.
Economics & Scarcity
1-1
• Economics
 Study of how scarce, or limited,
resources are used to satisfy
people’s unlimited material wants
and needs.
• Scarcity
 Inability to provide enough goods
and/or services to satisfy the wants
and needs of all people.
• Opportunity Cost
 Cost of a purchase or a decision
measured in terms of a foregone
alternative.
FIGURE 1-1
Scarcity, Choice, and
Influences on Decision
Makers
Efficiency & Equity
• Efficiency
 Producing the largest attainable output of a desired
quality from a given set of resources; occurs when goods
and services are produced at the lowest possible cost.
• If all goods and services were produced efficiently, society
would experience the greatest possible lessening of the
scarcity problem.
• Equity
 Just and equitable distribution of goods and services.
• The concept of what constitutes an equitable distribution of
goods and services is controversial because it is based on
people’s value judgments.
1-2
Factors of Production
• Factors of Production
 Resources used to produce goods and services, and
which are classified into one of four categories:
• Labor – includes all effort, both physical and mental;
receives wages
• Capital – includes warehouses, machinery, and equipment;
receives interest
• Land – includes all nature-originating production inputs;
receives rent
• Entrepreneurship – performance of a number of critical
tasks that are carried out in all productive processes;
receives profit
FIGURE 1-2
Relationship between Resources and Wants and Needs
1-3
Economic Theory & Policy
• Economic Theory
 Formal explanation of the relationship between economic
variables; provides a reason why something happens,
offers a cause-and-effect interpretation for a set of
events, or shows the effect on one variable when another
changes.
• Theories are often explored within the framework of a
model, which is composed of several elements:
• Economic Policy
 Action taken to change
or remedy an economic
condition, which is often
a result of a decision
made by a policymaker.
FIGURE 1-3
Economic Theory and Models
1-4
Tools of the Economist
• To express economic theories and policies, economists
often use one of three methods:
 Verbal presentation – descriptive statement used to state
the relationship between economic variables
• The quantity of coffee demanded will fall as its price
increases.
 Graph – picture used to illustrate the relationship
between economic variables
•
 Mathematical equation – written mathematical equation
used to prove the relationship between economic
variables
•
QC  600  100PC
1-5
Scarcity, Model Building, & Graphs
• In the following model all of a hypothetical economy’s
resources will be diverted to the production of only two
goods: VCRs and SUVs.
• Production Possibilities Table
 Lists the possible levels of production in an economy.
1-6a
Scarcity, Model Building, & Graphs
• Production Possibilities Curve
 Formed when data points from the production
possibilities table are plotted on a graph and connected.
• With the introduction of unemployment into the model,
the economy is unable to produce at its full potential.
• With the introduction of economic growth into the
model, the economy is able to produce above its
previous full potential.
1-6b
Microeconomics & Macroeconomics
• Macroeconomics
 Focuses on the operation of the economy as a whole and
the interactions of the household, business, government,
and foreign sectors in the economy.
• It includes such topics as inflation, unemployment, taxes
and government spending, and money.
• Microeconomics
 Focuses on the behavior of individual businesses and
households and on specific product and resource
markets.
• It includes such topics as consumer behavior, cost-benefit
analysis, the determination of business profits, and the
determination of prices in specific markets.
1-7
Graphing (Appendix Slide 1)
• Graph
 Picture of a relationship between two variables; variables
are given on the vertical and horizontal axes of the graph,
and the line in the graph provides a visual image of how
those variables are related.
• Graphs can be constructed in three steps:
• Step 1
 Identify the variables to be placed on the axes.
• Money data is often placed on the vertical axis.
1-8
Graphing (Appendix Slide 2)
• Step 2
 Assign numbers along the axes.
• Always use zero at the origin.
• Work up the number scale as you go out on each axis.
• Use equal spaces for equal amounts along the axes.
• Step 3
 Plot the data points and link the data points with a line.
1-9
Graphing (Appendix Slide 3)
• Direct Relationship
 Both variables move in the same direction; that is, as one
gets larger or smaller, so does the other.
• Indirect Relationship
 Both variables move in opposite directions; that is, as
one becomes larger, the other becomes smaller, and vice
versa.
1-10
Graphing (Appendix Slide 4)
• What type of relationship (direct or inverse) is illustrated
in each of these graphs?
• Electric Usage from Air Conditioning
 Direct
• Hours of Study
 Direct
• Price per Bottle of Wine
 Inverse
1-11
Graphing (Appendix Slide 5)
1-12
• The appearance of data in a graph can be affected by
how the axes of the graph are numbered.
 In the graph on the left, the interval of five pounds results
in a more jagged line and better represents the yearly
fluctuations.
 In the graph on the right, the interval of twenty-five
pounds results in a smoother line.
FIGURE 1-7 Economic Growth in a Production Possibilities Model
Chapter 1 - Introduction to Economics
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ECONOMICS
THEORY AND PRACTICE
Seventh Edition
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