The Nature and Method
of Economics
Chapter 1
SLIDES PREPARED BY JUDITH SKUCE, GEORGIAN COLLEGE
© 2002 McGraw-Hill Ryerson Ltd.
Chapter 1
1
In this chapter you will learn
The definition of economics
About the economic way of thinking
How economists construct theories
The distinction between
microeconomics and
macroeconomics
The pitfalls to objective thinking
© 2002 McGraw-Hill Ryerson Ltd.
Chapter 1
2
Chapter 1 Topics
Ten Key Concepts to Retain for a
Lifetime
The Economic Perspective
Economic Methodology
Macroeconomics & Microeconomics
Pitfalls to Objective Thinking
A Look Ahead
© 2002 McGraw-Hill Ryerson Ltd.
Chapter 1
3
Ten Key Concepts
The Individual
1.
2.
3.
4.
Facing Tradeoffs
Opportunity Costs
Choosing a Little More or Less
The Influence of Incentives
© 2002 McGraw-Hill Ryerson Ltd.
Chapter 1
4
Ten Key Concepts
Interaction Among Individuals
5.
6.
7.
Specialization & Trade
The Effectiveness of Markets
The Role of Governments
© 2002 McGraw-Hill Ryerson Ltd.
Chapter 1
5
Ten Key Concepts
The Economy as a Whole & the
Standard of Living
8.
9.
10.
Production & the Standard of
Living
Money & Inflation
Inflation-Unemployment
Tradeoff
© 2002 McGraw-Hill Ryerson Ltd.
Chapter 1
6
Chapter 1 Topics
Ten Key Concepts to Retain for a
Lifetime
The Economic Perspective
Economic Methodology
Macroeconomics & Microeconomics
Pitfalls to Objective Thinking
A Look Ahead
© 2002 McGraw-Hill Ryerson Ltd.
Chapter 1
7
The Economic Perspective
Scarcity & Choice
Rational Behaviour
Marginal Analysis: Benefits &
Costs
© 2002 McGraw-Hill Ryerson Ltd.
Chapter 1
8
Chapter 1 Topics
Ten Key Concepts to Retain for a
Lifetime
The Economic Perspective
Economic Methodology
Macroeconomics & Microeconomics
Pitfalls to Objective Thinking
A Look Ahead
© 2002 McGraw-Hill Ryerson Ltd.
Chapter 1
9
Economic Methodology
The scientific method:
observe the world
© 2002 McGraw-Hill Ryerson Ltd.
Chapter 1
10
Economic Methodology
The scientific method:
observe the world
formulate hypotheses
test by comparing outcomes to
predictions
theories, laws, principles,
models
© 2002 McGraw-Hill Ryerson Ltd.
Chapter 1
11
Economic Methodology
generalizations: on average
other-things-equal assumption:
change one thing at a time
abstractions: omit irrelevant
facts & circumstances
graphical expression
© 2002 McGraw-Hill Ryerson Ltd.
Chapter 1
12
Economic Methodology
Policy economics
apply theories to set policies to
resolve economic problems or
further economic goals
© 2002 McGraw-Hill Ryerson Ltd.
Chapter 1
13
FORMULATING ECONOMIC POLICY
STATE GOALS
POLICY OPTIONS
IMPLEMENTATION
& EVALUATION
© 2002 McGraw-Hill Ryerson Ltd.
Chapter 1
14
Economic Goals
economic growth
© 2002 McGraw-Hill Ryerson Ltd.
Chapter 1
15
Economic Goals
economic growth
full employment
© 2002 McGraw-Hill Ryerson Ltd.
Chapter 1
16
Economic Goals
economic growth
full employment
economic efficiency
© 2002 McGraw-Hill Ryerson Ltd.
Chapter 1
17
Economic Goals
economic growth
full employment
economic efficiency
price-level stability
© 2002 McGraw-Hill Ryerson Ltd.
Chapter 1
18
Economic Goals
economic growth
full employment
economic efficiency
price-level stability
economic freedom
© 2002 McGraw-Hill Ryerson Ltd.
Chapter 1
19
Economic Goals
economic growth
cheese
please
full employment
economic efficiency
price-level stability
economic freedom
equitable distribution of income
© 2002 McGraw-Hill Ryerson Ltd.
Chapter 1
20
Economic Goals
economic growth
full employment
economic efficiency
price-level stability
economic freedom
equitable distribution of income
economic security
© 2002 McGraw-Hill Ryerson Ltd.
Chapter 1
21
Economic Goals
economic growth
full employment
economic efficiency
price-level stability
economic freedom
equitable distribution of income
economic security
balance of trade
© 2002 McGraw-Hill Ryerson Ltd.
Chapter 1
22
Economic Goals
subject to interpretation
may be complementary
may conflict
priorities must be set
© 2002 McGraw-Hill Ryerson Ltd.
Chapter 1
23
Chapter 1 Topics
Ten Key Concepts to Retain for a
Lifetime
The Economic Perspective
Economic Methodology
Macroeconomics & Microeconomics
Pitfalls to Objective Thinking
A Look Ahead
© 2002 McGraw-Hill Ryerson Ltd.
Chapter 1
24
MACROECONOMICS...
© 2002 McGraw-Hill Ryerson Ltd.
Chapter 1
25