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1、,Chapter 1,Introducing the economic way of thinking,3,Key concepts,Defining the economic problem Defining the three types of resources Understanding entrepreneurship What are macro and microeconomics? The purpose of modelling What is ceteris paribus? Defining positive and normative economics,4,The p
2、roblem of scarcity,Scarcity forces us all to make choices as we never have the amount of goods and services we want: individuals: more clothes, etc. governments: more security, etc. Economics aims to explain what occurs as a result of scarcity because wants are forever greater than the available res
3、ources.,5,The economic problem,Scarcity is also called the economic problem Economists aim to show how individuals, groups and society can achieve the most wants given the resources at their disposal.,6,Resources,Resources are the basic categories of inputs used to produce goods and services. Resour
4、ces are also called the factors of production and are split into three main categories: land labour capital.,7,Resources: land,Any natural resource provided by nature used in the process of production, for example forests, minerals, wildlife, oil, rivers, lakes and oceans. May be renewable or non-re
5、newable.,8,Resources: labour,The mental and physical capacity of workers to produce goods and services, for example: farmers nurses lawyers.,9,Entrepreneurship,Entrepreneurship is a special type of labour: the creative ability of individuals to organise and manage the combination of resources to pro
6、duce goods and services.,10,Resources: capital,Capital relates to human-made goods that produce goods and services. Capital does not directly satisfy wants but is used to produce the goods and services desired, such as a factory that produce televisions. Money is not included in the economic definit
7、ion of capital as it is simply a measure of value placed on goods.,11,Economics: the study of scarcity and choice,Economics is the study of how society chooses to allocate its scarce resources to the production of goods and services in order to satisfy unlimited wants.,12,Two branches of economics,M
8、icroeconomics is the branch of economics that studies decision-making by a single individual, household, firm, industry or level of government. Macroeconomics is the branch of economics that studies decision-making for the economy as a whole.,13,The methodology of economics,Economists (like other sc
9、ientists) use scientific method. Scientific method is a step-by-step procedure for solving problems. 1 Identify the problem. 2 Develop a model. 3 Test the model.,14,The steps in the model-building process,15,More about models,A model is a simplified view of reality. It sets out the relationship betw
10、een variables; causes and effects. A model is valid when it enables economists to forecast or predict the results of various changes in variables.,Example: petrol consumption,Identifying the problem Petrol consumption has fallen. Why? Developing a model Select variables price of petrol, price of car
11、s. Express them verbally, graphically or mathematically. Testing the model Gather data which tells us how well the model estimates or predicts relationships.,16,17,Hazards of the economic way of thinking,There are two potential problems to be aware of: the ceteris paribus assumption possible confusi
12、on of association and causation.,18,Ceteris paribus,Ceteris (pronounced keteris) paribus is a Latin phrase which means other things remaining unchanged. Economists use this method as it enables them to see how a change in one variable affects the overall outcome. Imagine: if all the variables change
13、 at the same time, how would we know which one caused the change?,19,Association vs. causation,We cannot always assume that when one event follows another, the first caused the second. For example, assume exports from Indonesia rose last month. Two events might be associated: The hole in the ozone l
14、ayer grew last month. Currency movements reduced the cost to Australians of buying Indonesian goods. But are they both possible causes?,20,Why do economists disagree?,Economists agree on many things. As in other professions, disagreements occur. One explanation for disagreements is the difference be
15、tween positive and normative economics.,21,Positive economics,Positive economics is an analysis limited to statements that are verifiable. Positive statements are testable they can be proven true or false. Examples Airbags save lives. Smoking is harmful to your health.,22,Normative economics,Normati
16、ve economics is an analysis based on value judgements. Normative statements cannot be proven by facts to be true or false. They express opinions good, bad, ought to, should. Examples: Every teenager who wants a job should have one. The government should allocate more money to education.,Appendix to
17、Chapter 1,Applying graphs to economics,24,Key concepts,Why use graphs in economics? What is a direct relationship? What is an inverse relationship? What is an independent relationship between two variables? How do we measure the slope of a line? How do graphs show three-variable relationships?,25,Gr
18、aphs in economics,Graphs are one of the simplest ways to present, aid and help us to understand relationships and to see economic concepts at work. Graphs help economists to understand the relationships that exist between variables. You should learn to draw, describe and interpret them.,26,A direct
19、relationship,A direct relationship is a positive association between two variables. When one variable increases, the other also increases. When one variable decreases, the other also decreases. Note the line on the next slide has a positive slope.,27,A direct relationship,28,An inverse relationship,
20、An inverse relationship is a negative association between two variables. When one variable increases, the other decreases. When one variable decreases, the other increases. Note the line on the next slide has a negative slope.,29,An inverse relationship,30,An independent relationship,An independent
21、relationship is a zero association between two variables. When one variable changes, the other remains unchanged.,31,An independent relationship,32,The slope of a straight line,The ratio of change in the variable on the vertical axis (the rise or fall) to change in the variable on the horizontal axi
22、s (the run). Slope = rise/run = vertical axis/horizontal axis = Y/X,33,The slope of a curve,A straight-line relationship is a linear relationship. The slope of a curve changes from one point on the curve to another. To determine the slope of a curve at any point, draw a tangent to the line at that p
23、oint, and measure the slope of the tangent.,34,The slope of a curve,35,Introducing a third variable,How can a model drawn in two dimensions show the impact of changes in a third variable? We must distinguish between movements and shifts. Movements along a graph show changes in one of the variables on the graphs axes. Shifts show changes in other variables.,36,A three-variable relationship,