Part I/Lecture Notes
1
PART I
LECTURE NOTES
© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for
use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school approved
learning management system for classroom use.
, Chapter 1/What Is Economics? 3
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 importantly, very likely throughout their careers.
CHAPTER OUTLINE
IDEAS FOR BEYOND THE FINAL EXAM
These are the most important ideas in the book, all of which will be picked up and discussed in
greater detail in later chapters. All of the ideas are in the combined text, and several are excluded
in each of the micro and macro texts.
1. How Much Does it Really Cost?
2. Attempts to Repeal the Laws of Supply and Demand—The Market Strikes Back
3. The Surprising Principle of Comparative Advantage
4. Trade Is a Win-Win Situation
5. Government Policies Can Limit Economic Fluctuations—But Don’t Always Succeed
6. The Short-Run Trade-Off between Inflation and Unemployment
7. Productivity Growth is (Almost) Everything in the Long Run
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.
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.
© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for
use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school approved
learning management system for classroom use.
, Chapter 1/What Is Economics? 4
Skillful 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: Imperfect Information and Value Judgments
Economists agree on more than the public gives them credit for.
Disagreements arise often because the relevant facts are unknown, or because economists
have different value judgments.
APPENDIX: USING GRAPHS: A REVIEW
Graphs Used in Economic Analysis
Graphs are useful visual aids that help us see relationships between variables.
Two-Variable Diagrams
A two-dimensional graph simultaneously represents the behavior 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 45º Lines
Along a ray from the origin, the ratio of the variables on the two axes is constant.
Along a 45° 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 AND KEY TERMS
Opportunity cost: the value of the next best alternative that must be given up because of that
decision.
Abstraction: ignoring many details so as to focus on the most important elements of a problem.
© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for
use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school approved
learning management system for classroom use.
, Chapter 1/What Is Economics? 5
Theory: a deliberate simplification of relationships whose purpose is to explain how those
relationships work.
Correlation: when two variables move together; correlation need not imply causation.
Economic model: a simplified, small-scale version of some aspect of the economy expressed in
equations, by graphs, or in words.
Variable: something measured by a number; it is used to analyze what happens to other things
when the size of that number changes (varies).
The origin: the “0” point in the lower left-hand corner of a graph where the axes meet.
Diagram: abstraction from many details, some of which may be quite interesting, so as to focus
on the two variables of primary interest.
Slope of a straight line: the ratio of the vertical change to the corresponding horizontal cahnage
as we move to the right.
Slope of a curved line: at a particular point is defined as the slope of the straight line that is
tangent to the curve at that point.
Tangent to a Curve: to a curve at some point, Z, on that curve is a straight line through point Z
does not cut the curve at that point.
Y-intercept: point at which a line or curve touches the vertical axis.
Ray through the origin, or ray: a line whose y-intercept is zero.
45° line: a ray through the origin with a slope of +1.
Production indifference map: a graph whose axes show the quantities of two inputs that are
used to produce some output.
MAJOR IDEAS
1. Pick a few. Many economists would emphasize at least Idea 1, opportunity cost and Idea
4, trade is a win-win situation.
2. A model is required if one is to make sense out of an infinitely complicated real world.
3. Because graphs are used so often to portray economic models, it is important for students
to acquire some understanding of their construction and use.
4. 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.
5. 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.
© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for
use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school approved
learning management system for classroom use.
1
PART I
LECTURE NOTES
© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for
use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school approved
learning management system for classroom use.
, Chapter 1/What Is Economics? 3
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 importantly, very likely throughout their careers.
CHAPTER OUTLINE
IDEAS FOR BEYOND THE FINAL EXAM
These are the most important ideas in the book, all of which will be picked up and discussed in
greater detail in later chapters. All of the ideas are in the combined text, and several are excluded
in each of the micro and macro texts.
1. How Much Does it Really Cost?
2. Attempts to Repeal the Laws of Supply and Demand—The Market Strikes Back
3. The Surprising Principle of Comparative Advantage
4. Trade Is a Win-Win Situation
5. Government Policies Can Limit Economic Fluctuations—But Don’t Always Succeed
6. The Short-Run Trade-Off between Inflation and Unemployment
7. Productivity Growth is (Almost) Everything in the Long Run
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.
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.
© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for
use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school approved
learning management system for classroom use.
, Chapter 1/What Is Economics? 4
Skillful 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: Imperfect Information and Value Judgments
Economists agree on more than the public gives them credit for.
Disagreements arise often because the relevant facts are unknown, or because economists
have different value judgments.
APPENDIX: USING GRAPHS: A REVIEW
Graphs Used in Economic Analysis
Graphs are useful visual aids that help us see relationships between variables.
Two-Variable Diagrams
A two-dimensional graph simultaneously represents the behavior 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 45º Lines
Along a ray from the origin, the ratio of the variables on the two axes is constant.
Along a 45° 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 AND KEY TERMS
Opportunity cost: the value of the next best alternative that must be given up because of that
decision.
Abstraction: ignoring many details so as to focus on the most important elements of a problem.
© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for
use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school approved
learning management system for classroom use.
, Chapter 1/What Is Economics? 5
Theory: a deliberate simplification of relationships whose purpose is to explain how those
relationships work.
Correlation: when two variables move together; correlation need not imply causation.
Economic model: a simplified, small-scale version of some aspect of the economy expressed in
equations, by graphs, or in words.
Variable: something measured by a number; it is used to analyze what happens to other things
when the size of that number changes (varies).
The origin: the “0” point in the lower left-hand corner of a graph where the axes meet.
Diagram: abstraction from many details, some of which may be quite interesting, so as to focus
on the two variables of primary interest.
Slope of a straight line: the ratio of the vertical change to the corresponding horizontal cahnage
as we move to the right.
Slope of a curved line: at a particular point is defined as the slope of the straight line that is
tangent to the curve at that point.
Tangent to a Curve: to a curve at some point, Z, on that curve is a straight line through point Z
does not cut the curve at that point.
Y-intercept: point at which a line or curve touches the vertical axis.
Ray through the origin, or ray: a line whose y-intercept is zero.
45° line: a ray through the origin with a slope of +1.
Production indifference map: a graph whose axes show the quantities of two inputs that are
used to produce some output.
MAJOR IDEAS
1. Pick a few. Many economists would emphasize at least Idea 1, opportunity cost and Idea
4, trade is a win-win situation.
2. A model is required if one is to make sense out of an infinitely complicated real world.
3. Because graphs are used so often to portray economic models, it is important for students
to acquire some understanding of their construction and use.
4. 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.
5. 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.
© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for
use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school approved
learning management system for classroom use.
