CHAPTER 1 - THE ART AND SCIENCE OF ECONOMIC ANALYSIS



CHAPTER 1 - THE ART AND SCIENCE OF ECONOMIC ANALYSIS (6e)

I. The Economic Problem

Scarce resources v. unlimited wants

ECONOMICS:

A. Resources

1) Categories of resources

a) Labor

b) Capital

c) Land

d) Entrepreneurial ability

2) Payments to resource owners

a) Wages for labor

b) Interest for capital

c) Rent for land

d) Profit for entrepreneurship

B. Goods and Services

Resources are combined to produce:

Goods

Services

C. Economic Decision Makers

1) Households (leading role)

2) Firms

3) Governments

4) The rest of the world

The economic decision makers interact by means of markets.

MARKET:

Product market

Resource market

D. A Simple Circular Flow Model

Circular flow model:

Study the diagram on p. 5; be sure you understand the flows of resources, products, and money between households and firms.

II. The Art of Economic Analysis

Study pp. 6-8 carefully on your own.

Focus on the meaning of marginal analysis (p. 7).

Understand the difference between microeconomics and macroeconomics (pp. 7-8).

III. The Science of Economic Analysis

Study pp. 8-16 carefully on your own.

Understand the concept of an economic theory or model (p. 8).

Know the difference between positive and normative economic statements (p. 10).

Point of interest: The Case Study on p. 14 and Exhibit 3 on p. 15 show the excellent earning potential for economics majors (male and female) compared to many other majors. If you would like to talk about economics as a possible major for you, please come by my office—I would be happy to discuss this with you!

APPENDIX TO CHAPTER 1 - UNDERSTANDING GRAPHS

Graph: a picture showing how variables relate

Components of a Graph:

See Ex. 4

Origin - represents zero value for both variables

Horizontal axis - measures values for the variable “x”

Vertical axis - measures values for the variable “y”

Note: It is often true that one variable depends on (i.e., is determined by) the other. For example, if the value of x depends on the value of y, then x is the dependent variable and y is the independent variable.

I. Drawing Graphs Based on the Relations Between Variables

A. Positive (Direct) Relation Between Variables

See Ex. 6, Ex. 7, and Ex. 8(a) for examples

B. Negative (Inverse) Relation Between Variables

See Ex. 8(b) for an example

C. Variables may the Independent (Unrelated)

See Ex. 8(c) and 8(d) for examples

II. Slopes of Straight Lines

Slope: how much the vertical axis variable’s value changes for a given change in the horizontal axis variable’s value

Slope = change in vertical axis value

change in horizontal axis value

Positive relation ( positive slope

See Ex. 8(a)

Negative relation ( negative slope

See Ex. 8(b)

Slope, Units of Measurement, and Marginal Analysis

and

IV. Slopes of Curved Lines

Read pp. 21-23. Know how to calculate slopes.

V. Line Shifts

See Ex. 12

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