PART 1- LECTURE NOTES

PART 1- LECTURE NOTES

CHAPTER 1

WHAT IS ECONOMICS?

Chapter 1 introduces students to the subject of economics in two principal ways—by presenting several “ideas for beyond the final exam,” and by discussing the concepts of abstraction and modeling. The appendix introduces some of the techniques of graphic analysis—tools students will use throughout the book and, more important, very likely throughout their careers.

CHAPTER OUTLINE

THE RANGE OF ECONOMICS

It is difficult to define the “range of economics”. Of several definitions offered in the textbook, that of Sir Lionel Robbins seems to be the most fortunate: study of “behaviour conditioned by scarcity.”

MICROECONOMICS vs. MACROECONOMICS Macroeconomists focus on the study of the economic system as a whole; Microeconomists focus on individual markets or agents in isolation.

INSIDE THE ECONOMIST’S TOOLKIT

ECONOMICS AS A DISCIPLINE

Economics is the most scientific of the social sciences, yet much more social than the natural sciences.

THE NEED FOR ABSTRACTION

Because the real economic world is so complex, economists must abstract from details, in order to focus on the most important details. Much of the art of economics involves finding the most useful degree of abstraction.

Part I/Lecture Notes

THE ROLE OF ECONOMIC THEORY

A theory is a deliberate simplification of factual relationships that attempts to explain how those relationships work.

Statistical correlation does not necessarily imply causation.

Skilful use of economic theory helps to predict future events.

WHAT IS AN ECONOMIC MODEL?

An economic model is a simplified, small-scale version of some aspect of the economy. Economic models are often expressed in equations, by graphs, or in words.

REASONS FOR DISAGREEMENTS: ROLE OF ASSUMPTIONS AND VALUE

JUDGMENTS

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Part 1- Lecture Notes

Disagreements arise often because they start with different assumptions, or because economists have different value judgments.Possibly more than in any other discipline, conclusions in economics will depend on assumptions with which one begins the analysis. That is why the assumptions need to be stated clearly.

APPENDIX: USING GRAPHS: A REVIEW

GRAPHS USED IN ECONOMIC ANALYSIS

TWO-VARIABLE DIAGRAMS

A two-dimensional graph simultaneously represents the behaviour of two variables.

THE DEFINITION AND MEASUREMENT OF SLOPE

The slope of a straight line is the ratio of the vertical change to the corresponding horizontal change as we move right along the line.

Curved lines also have slopes, the numerical values of which are different at every point along the curve.

The slope of a smooth curved line is the same as the slope of the straight line that is tangent to the curve at that point.

RAYS THROUGH THE ORIGIN AND 45-DEGREE LINES

Along a ray from the origin, the ratio of the variables on the two axes is constant.

Along a 45-degree ray, the ratio is one (the variable measured on each axis have equal values).

SQUEEZING THREE DIMENSIONS INTO TWO: CONTOUR MAPS

Contour lines can be used to show three dimensions in a two-dimensional space.

MARGIN DEFINITIONS

Economics is a method of analyzing individual and social behaviour, especially as it relates to market phenomena.

A paradox is a contradiction between two principles that operate at different levels; it often involves an outcome that is contrary to intuition.

The fallacy of composition is the error of believing that what is true of each part of a system will also be true of the system as a whole.

Post hoc, ergo propter hoc fallacy is the error of assuming that is some event occurred before another, then the first one must have caused the second.

Opportunity Cost: the value of the next best alternative that is not chosen. Abstraction: focusing on the most important elements of a problem.

Theory: a simplification of relationships whose purpose is to explain how those relationships work.

Correlation: when two variables move together.

Economic Model: a simplified version of some aspect of the economy.

MAJOR IDEAS

• A lot of, if not most, of economics rests on understanding scarcity and opportunity cost.
• A model is required, if one is to make sense out of an infinitely complicated real world.

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• Because graphs are used so often to portray economic models, it is important for students to

acquire some understanding of their construction and use.

• Often, the most important property of a line or curve drawn on a diagram will be its slope, which is

defined as the ratio of the “rise” over the “run,” or the vertical change divided by the horizontal change. Curves that go uphill as we move to the right have positive slopes, while curves that go downhill have negative slopes.

• By definition, a straight line has the same slope wherever we choose to measure it. The slope of

a curved line changes, but the slope at any point on the curve can be calculated by measuring the slope of a straight line tangent to the curve at that point.

ON TEACHING THE CHAPTE R

Instructors who are pressed for time may skip most of this chapter, leaving it for the students to read on their own. If you can find time for it, however, an investment in this chapter will pay dividends later in the course, because it should succeed in exciting students about the subject.

One of the central points of the chapter’s discussion of methods—that theory is necessary for policy analysis—can be illustrated by picking a current issue of public policy out of the news. Students can be asked to see what model is being used as the basis for specific policy recommendations.

It is important to explain the difference between correlation and causation. The text uses a good example on page 10. Correlation and causation are often misunderstood and spending class time clarifying the distinction between the two will benefit the students immensely.

Be prepared to face considerable variation in students’ pre-existing skills in math and graphing. Well- prepared students will not need to spend much time on the appendix, but students with weak backgrounds in graphical analysis will need drill on these materials and will need the instructor’s help as well. Time spent helping the students become comfortable interpreting graphs will reap dividends throughout the course.

Ask students to bring in a graph from a newspaper or magazine. Have students work in groups to analyze their graphs. Count how many graphs contain obvious errors and discuss whether the graphs are likely to be purposely misleading (is the author trying to convince the reader?) or merely the result of sloppy work.

DISCUSSION QUESTIONS

• What is the opportunity cost of attending this class for each student? Which elements should be

included in calculation? Is the opportunity cost of attending a class smaller or greater than the value of tuition? Students should justify their answers.

• Can you think of a person rich enough not to face scarcity? Would you agree with the statement

“the richer the person, the less scarcity he or she faces; therefore the richest people in the world do not face scarcity”? Explain your answer.

• Think of your own example of the fallacy of composition.

• Can you list at least three assumptions you made – explicitly or implicitly – when you set off to

come and attend this class today? Are assumptions specific to scientific reasoning or do we use them in our day to day lives?

• Can you think of at least two examples, either historical or current, that show how ideological or

financial influences affect conclusions reached by scientists or scholars?

• “Going to college or a university for you, the student, is an example of constrained optimization.”

Do you agree? Why or why not?

• Would government’s decision to ban the imports of specific brand of toys (because of safety

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Part 1- Lecture Notes

reasons) be a macroeconomic decision, since it is applied to the whole country (i.e. these toys will be banned from Halifax to Vancouver Island)?

• Suppose you are studying for a really hard exam which is coming really soon. Try to portray this

process on a two-dimensional diagram. Put the hours of study per evening on the horizontal, and the % score you are likely to achieve on the exam on the vertical axis. What, if anything, will happen to the slope of the curve as you increase the number of hours of study per evening?Justify your answer..Copyright © 2009 by Nelson Education Ltd. 4

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