The Scope and Method of Economics

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© 2004 Prentice Hall Business Publishing© 2004 Prentice Hall Business Publishing Principles of Economics, 7/ePrinciples of Economics, 7/e Karl Case, Ray FairKarl Case, Ray Fair

The Scope andMethod of Economics

Appendix: How to Read and Understand Graphs


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Dr. İdil Göksel

[email protected]

Office hours: Wednesday 14:30 – 17:30

Office: C 723

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mailto:[email protected]


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The Study of Economics

• Economics is the study of how individuals and societies choose to use the scarce resources to satisfy unlimited human wants.


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Why Study Economics?

Three fundamental concepts:

• Scarcity• Choice• Opportunity cost


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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 trade-offs.


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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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• 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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Examples of microeconomic and macroeconomic concernsProduction Prices Income Employment

Microeconomics Production/Output in Individual Industries and Businesses How much steelHow many officesHow many cars

Price of Individual Goods and Services Price of medical carePrice of gasolineFood pricesApartment rents

Distribution of Income and Wealth Wages in the auto industryMinimum wagesExecutive salariesPoverty

Employment by Individual Businesses & IndustriesJobs in the steel industryNumber of employees in a firm

Macroeconomics National Production/Output Total Industrial OutputGross Domestic ProductGrowth of Output

Aggregate Price Level Consumer pricesProducer PricesRate of Inflation

National IncomeTotal wages and salaries

Total corporate profits

Employment and Unemployment in the Economy Total number of jobsUnemployment rate


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The Method of Economics

• Positive economics studies economic behavior without making judgments. It describes what exists and how it works.


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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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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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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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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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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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Appendix:How to Read and Understand Graphs

• A graph is a two-dimensional 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)

100015002000250030003500400045005000550060006500700075008000

1975 1980 1985 1990 1995 2000

Year

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• 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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• The point at which the The point at which the line intersects the Y-line intersects the Y-axis (point axis (point aa) is called ) is called the the Y-intercept.Y-intercept.

• TheThe Y-intercept Y-intercept, is the , is the value of value of YY when when XX = 0. = 0.


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• The The slopeslope of the line of the line indicates whether the indicates whether the relationship between relationship between the variables is positive the variables is positive or negative.or negative.

• The slope of the line is The slope of the line is computed as follows:computed as follows:

b =YX

Y YX X

1 0

1 0


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• This line slopes upward, indicating that there seems to be a positive relationship between income and spending.


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A A downward-slopingdownward-sloping line describes a line describes a negative relationshipnegative relationship between X and Y.between X and Y.

An An upward-slopingupward-sloping line describes a line describes a positive relationshippositive relationship between X andbetween X and Y.Y.


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b 5

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b 0

100 b

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The Scope and Method of Economics

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