Econ 2003 Chapter 1

Introduction to Economics
Dr. Eren Yıldız-Geyhan

Marmara University Engineering Faculty
[email protected]
Copyright © 2017 Pearson Education, Inc. 1-1
Course Sources

Course Sources

Course Sources
http://www.caglayan.com/MARMARA.aspx
Course ID geyhan70339
Course Name Econ2003_summer2020

Course Grading
Midterm Exam » 40 %
Homework/Quizzes » 20 %
Final Exam » 40 %
Total » 100%

Course Purpose
The purpose of this lesson is to understand what the

economy is, why it is important, and how it works on
our daily life

Course Outline
Course Chapter Topic(s)

1 1 The scope and method of economics
2 2 The economic problem: scarcity and choice
2 3 Demand, supply, and market equilibrium
3 4 Demand and supply applications
4 5 Elasticty
5 6 The household behavior and consumer choice
5 7 The production process : the behavior of profit maximizing firms
6 8 Short-run costs and output decisions
6 9 Long-run costs and output decision
7 - Midterm Examination

Course Outline
Course Chapter Topic(s)

8 10 Input demand : The labor and land markets
8 11 Input demand : The capital market and investment decision
8 12 General equilibriım and efficiency of perfect competition
9 20 Introduction to macroeconomics
9-10 21 Measuring national output and national income
10 22 Unemployement, inflation, and long-run growth
11 23 Aggregate expenditure and equilibrium output
11 24 The government and fiscal policy
12 25 Money, federal reserve and the interest rate
12 26 The determination of aggregate output, the price level and interest rate
13 33 International trade, comparative advantage
13 34 The balance of payments and exchange rates
13 35 Economic growth in developing economies
14 - Final Examination

Principles of Economics
The Scope and

Chapter 1 Method of Economics

Chapter Outline and Learning Objectives
Why Study Economics?
• Identify three key reasons to study economics. Think of an example from your life in which
understanding opportunity costs or the principle of efficient markets could make a difference in your
decision making.
The Scope of Economics
• Describe microeconomics, macroeconomics, and the diverse fields of economics.
The Method of Economics
• Think about an example of bad causal inference leading to erroneous decision making. Identify the
four main goals of economic policy.
Appendix
• Understand how data can be graphically represented.

Chapter 1
The Scope and Method of Economics
What is economis ?
shock markets
what to do with money
inflation
unemployement

Chapter 1
Think about all the things you need / consume

Chapter 1
Why
«most of us never have enough to get all the things we want»
Because;
there is a limited amount of resources to satisfy unlimited wants

This is because of scarcity

Chapter 1
Scarcity is a problem
How do we solve this problem ?
Economics is solution for scarcity problem
In another word,
scarcity is why economics exist

Chapter 1
economics
The study of how individuals and societies choose to use the scarce
resources that nature and previous generations have provided.
• The key word in the definition is choose.

• Economics is the study of how people make choices.
• Economics is a behavioral, or social science.

There are three main reasons to study economics:
 to learn way of thinking

 to understand society
 to be an informed citizen

To Learn a Way of Thinking

Economics has three fundamental concepts:
 Opportunity cost
 Marginalism
 Efficient markets

Opportunity Cost
opportunity cost The best alternative that we forgo, or give up, when
we make a choice or decision.
scarce Limited.

Marginalism
The process of analyzing the additional or

incremental costs or benefits arising from
a choice or decision.

Efficient Markets—No Free Lunch

efficient market A market in which profit opportunities are eliminated
almost instantaneously.

Microeconomics and Macroeconomics
microeconomics The branch of economics that examines the

functioning of individual industries and the behavior of individual
decision-making units—that is, firms and households.
macroeconomics The branch of economics that examines the

economic behavior of aggregates—income, employment, output, and so
on—on a national scale.

Microeconomics and Macroeconomics
Microeconomics looks at the individual unit—the

household, the firm, the industry.
It sees and examines the “trees.”
Macroeconomics looks at the whole, the

aggregate.
It sees and analyzes the “forest.”

TABLE 1.1 Examples of Microeconomic and Macroeconomic
Concerns
Division
of Economics Production Prices Income Employment
Microeconomics Production/output Prices of individual Distribution of Employment by
in individual goods and services income and individual
industries and Price of medical care wealth businesses and
businesses Price of gasoline Wages in the industries
How much steel Food prices auto industry Jobs in the steel
How much office Apartment rents Minimum wage industry
space Executive Number of
How many cars salaries employees in a firm
Poverty Number of
accountants
Macroeconomics National Aggregate price level National income Employment and

production/output Consumer prices Total wages and unemployment in
Total industrial Producer prices salaries the economy
output Rate of inflation Total corporate Total number of jobs
Gross domestic profits Unemployment rate
product
Growth of output

Economics deals with two kinds of questions: positive and normative.
positive economics An approach to economics that seeks to

understand behavior and the operation of systems without making
judgments. It describes what exists and how it works.
normative economics An approach to economics that analyzes

outcomes of economic behavior, evaluates them as good or bad, and
may prescribe courses of action.


Theories and Models
• model
A formal statement of a theory, usually a mathematical statement of a presumed

relationship between two or more variables.
• variable
A measure that can change from time to time or from observation to observation.
• Ockham’s razor
The principle that irrelevant detail should be cut away.
• ceteris paribus, or all else equal
A device used to analyze the relationship between two variables while the values
of other variables are held unchanged.

Theories and Models
Cautions and Pitfalls

Economists are interested in cause and effect, but sorting out causality from
correlation is not always easy.
post hoc, ergo propter hoc
“after this (in time), therefore because of this.”
A common error made in thinking about causation: If Event A happens before

Event B, it is not necessarily true that A caused B.

Theories and Models
Testing Theories and Models: Empirical Economics
empirical economics The collection and use of data to test economic theories.

Economic Policy
Four criteria are important in judging economic outcomes:
• efficiency In economics, allocative

1. Efficiency efficiency. An efficient economy is one
2. Equity that produces what people want at the
least possible cost.
3. Growth
4. Stability • equity Fairness.
• economic growth An increase in the

total output of an economy.
• stability A condition in which national

output is growing steadily, with low
inflation and full employment of
resources.

REVIEW TERMS AND CONCEPTS
• ceteris paribus, or all else equal • normative economics
• economic growth • Ockham’s razor
• economics • opportunity cost
• efficiency • positive economics
• efficient market • post hoc, ergo propter hoc
• empirical economics • scarce
• equity • stability
• macroeconomics • variable
• Marginalism
• microeconomics
• model

CHAPTER 1 APPENDIX:
How to Read and Understand Graphs
• graph A two-dimensional representation of a set of numbers or data.
Time Series Graphs
• time series graph A graph illustrating how a variable changes over

time.

TABLE 1A.1 Total Disposable
Personal Income in the United FIGURE 1A.1 Total Disposable Personal Income in the
States, 1975–2014 (in Billions of United States: 1975–2014 (in Billions of Dollars)
Dollars)
Total Total
Disposable Disposable
Personal Personal
Year Income Year Income
1975 1,219 1995 5,533
1976 1,326 1996 5,830
1977 1,457 1997 6,149
1978 1,630 1998 6,561
1979 1,809 1999 6,876
1980 2,018 2000 7,401
1981 2,251 2001 7,752
1982 2,425 2002 8,099
1983 2,617 2003 8,466
1984 2,904 2004 9,002
1985 3,099 2005 9,401
1986 3,288 2006 10,037
1987 3,466 2007 10,507
1988 3,770 2008 10,994
1989 4,052 2009 10,943
1990 4,312 2010 11,238
1991 4,485 2011 11,801
1992 4,800 2012 12,384
1993 5,000 2013 12,508
1994 5,244 2014 12,981
Source: U.S. Department of Commerce, Bureau of Economic Analysis. Source: See Table 1A.1.

Plotting Income and Consumption Data for Households
• positive relationship
A relationship between two variables, X and Y, in which a decrease in X
is associated with a decrease in Y and an increase in X is associated
with an increase in Y.
• negative relationship
A relationship between two variables, X and Y, in which a decrease in X
is associated with an increase in Y and an increase in X is associated
with a decrease in Y.

FIGURE 1A.2 Household Consumption and
Income
TABLE 1A.2 Consumption
Expenditures and Income, 2012
Average
Consumption
Average Income
Expenditures
Before Taxes
Bottom fifth $ 9,988 $ 22,154
2nd fifth 27,585 32,632
3rd fifth 47,265 43,004
4th fifth 75,952 59,980
Top fifth 167,010 99,368
Source: Consumer Expenditures in 2012, U.S. Bureau

of Labor Statistics.
Source: See Table 1A.2.
A graph is a simple two-dimensional geometric representation of data.
Along the horizontal scale (X-axis), we measure household income.
Along the vertical scale (Y-axis), we measure household consumption.

Slope
slope
A measurement that indicates whether the relationship between variables
is positive or negative and how much of a response there is in Y when X
changes.

FIGURE 1A.3 A Curve with (a) Positive Slope and (b) Negative Slope

FIGURE 1A.4 Changing Slopes along Curves

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Introduction to Economics

Dr. Eren Yıldız-Geyhan

Copyright © 2017 Pearson Education, Inc. 1-2

Copyright © 2017 Pearson Education, Inc. 1-3

Copyright © 2017 Pearson Education, Inc. 1-4

Copyright © 2017 Pearson Education, Inc. 1-5

The purpose of this lesson is to understand what the

Copyright © 2017 Pearson Education, Inc. 1-6

Course Chapter Topic(s)

Copyright © 2017 Pearson Education, Inc. 1-7

Course Chapter Topic(s)

Copyright © 2017 Pearson Education, Inc. 1-8

The Scope and

Copyright © 2017 Pearson Education, Inc. 1-9

Why Study Economics?

The Scope of Economics

• Describe microeconomics, macroeconomics, and the diverse fields of economics.

The Method of Economics

• Understand how data can be graphically represented.

Copyright © 2017 Pearson Education, Inc. 1-10

what to do with money

Copyright © 2017 Pearson Education, Inc. 1-11

Think about all the things you need / consume

Copyright © 2017 Pearson Education, Inc. 1-12

there is a limited amount of resources to satisfy unlimited wants

Copyright © 2017 Pearson Education, Inc. 1-13

Economics is solution for scarcity problem

Copyright © 2017 Pearson Education, Inc. 1-14

• The key word in the definition is choose.

Copyright © 2017 Pearson Education, Inc. 1-15

There are three main reasons to study economics:

 to learn way of thinking

Copyright © 2017 Pearson Education, Inc. 1-16

To Learn a Way of Thinking

Copyright © 2017 Pearson Education, Inc. 1-17

Copyright © 2017 Pearson Education, Inc. 1-18

The process of analyzing the additional or

Copyright © 2017 Pearson Education, Inc. 1-19

Efficient Markets—No Free Lunch

Copyright © 2017 Pearson Education, Inc. 1-20

Microeconomics and Macroeconomics

microeconomics The branch of economics that examines the

macroeconomics The branch of economics that examines the

Copyright © 2017 Pearson Education, Inc. 1-21

Microeconomics and Macroeconomics

Microeconomics looks at the individual unit—the

Macroeconomics looks at the whole, the

Copyright © 2017 Pearson Education, Inc. 1-22

Macroeconomics National Aggregate price level National income Employment and

Copyright © 2017 Pearson Education, Inc. 1-23

Economics deals with two kinds of questions: positive and normative.

positive economics An approach to economics that seeks to

normative economics An approach to economics that analyzes

Copyright © 2017 Pearson Education, Inc. 1-24

Copyright © 2017 Pearson Education, Inc. 1-25

A formal statement of a theory, usually a mathematical statement of a presumed

The principle that irrelevant detail should be cut away.

• ceteris paribus, or all else equal

Copyright © 2017 Pearson Education, Inc. 1-26