Two variables that increase or decrease together have a positive correlation. Two variables that move in opposite directions one increases when the other decreases have a negative correlation. Curves in the Coordinate System 1. Often, economists want to show how one variable affects another, holding all other variables constant. Table A-1 Figure A-3 a. An example of this is a demand curve. The demand curve shows how the quantity of a good a consumer wants to purchase varies as its price varies, holding everything else such as income constant.
If income does change, this will alter the amount of a good that the consumer wants to purchase at any given price. Thus, the relationship between price and quantity desired has changed and must be represented as a new demand curve. A simple way to tell if it is necessary to shift the curve is to look at the axes.
When a variable that is not named on either axis changes, the curve shifts. Slope Figure A-5 1. We may want to ask how strongly a consumer reacts if the price of a product changes. If the demand curve is very steep, the quantity desired does not change much in response to a change in price. If the demand curve is very flat, the quantity desired changes a great deal when the price changes.
A small slope in absolute value means that the demand curve is relatively flat; a large slope in absolute value means that the demand curve is relatively steep.
Cause and Effect 1. Economists often make statements suggesting that a change in Variable A causes a change in Variable B. Ideally, we would like to see how changes in Variable A affect Variable B, holding all other variables constant. This is not always possible and could lead to a problem caused by omitted variables.
Figure A-6 a. But, if Variable C has also changed, it is entirely possible that Variable C is responsible for the change in Variable B. Another problem is reverse causality. However, it is entirely possible that the change in Variable B led to the change in Variable A. It is not always as simple as determining which variable changed first because individuals often change their behavior in response to a change in their expectations about the future.
There are two very good examples in the text that you should use in class. To discuss the omitted variable problem, point out to students that a rise in the sales of cigarette lighters is positively related to the number of individuals diagnosed with lung cancer. To discuss reverse causality, show that an increase in minivan sales is followed by an increase in birth rates. Economics is like a science because economists devise theories, collect data, and analyze the data in an attempt to verify or refute their theories.
In other words, economics is based on the scientific method. Figure 1 shows the production possibilities frontier for a society that produces food and clothing. Point A is an efficient point on the frontier , point B is an inefficient point inside the frontier , and point C is an infeasible point outside the frontier.
Figure 1 The effects of a drought are shown in Figure 2. The drought reduces the amount of food that can be produced, shifting the production possibilities frontier inward. Figure 2 Microeconomics is the study of how households and firms make decisions and how they interact in markets. Macroeconomics is the study of economy-wide phenomena, including inflation, unemployment, and economic growth. Many other examples are possible.
Many other answers are possible. Economic advisers to the president might disagree about a question of policy because of differences in scientific judgments or differences in values. Chapter Quick Quiz 1. Economics is a science because economists use the scientific method. Economists use theory and observation like other scientists, but they are limited in their ability to run controlled experiments.
Instead, they must rely on natural experiments. Economists make assumptions to simplify problems without substantially affecting the answer. Assumptions can make the world easier to understand. An economic model cannot describe reality exactly because it would be too complicated to understand. A model is a simplification that allows the economist to see what is truly important. There are many possible answers. There are many possible answers, including interactions involving government or international trade.
Figure 3 shows a production possibilities frontier between milk and cookies PPF1. If a disease kills half of the economy's cow population, less milk production is possible, so the PPF shifts inward PPF2.
Note that if the economy produces all cookies, it does not need any cows and production is unaffected. But if the economy produces any milk at all, then there will be less production possible after the disease hits. Figure 3 7. An outcome is efficient if the economy is getting all it can from the scarce resources it has available.
In terms of the production possibilities frontier, an efficient point is a point on the frontier, such as point A in Figure 4. When the economy is using its resources efficiently, it cannot increase the production of one good without reducing the production of the other.
A point inside the frontier, such as point B, is inefficient since more of one good could be produced without reducing the production of another good. The two subfields in economics are microeconomics and macroeconomics. Microeconomics is the study of how households and firms make decisions and how they interact in specific markets. Positive statements are descriptive and make a claim about how the world is, while normative statements are prescriptive and make a claim about how the world ought to be.
Here is an example. Positive: A rapid growth rate of money is the cause of inflation. Normative: The government should keep the growth rate of money low. Economists sometimes offer conflicting advice to policymakers for two reasons: 1 economists may disagree about the validity of alternative positive theories about how the world works; and 2 economists may have different values and, therefore, different normative views about what public policy should try to accomplish.
See Figure 5; the four transactions are shown. Acme's capital d. Acme's capital Markets for Factors of Production b. Figure 6 shows a production possibilities frontier between guns and butter.
It is bowed out because of the law of increasing opportunity costs. As the economy moves from producing many guns and a little butter point H to producing fewer guns and more butter point D , the opportunity cost of each additional unit of butter increases because the resources best suited to producing guns are shifting toward the production of butter.
Thus, the number of guns given up to produce one more unit of butter is increasing. Point A is impossible for the economy to achieve; it is outside the production possibilities frontier. Point B is feasible but inefficient because it is inside the production possibilities frontier.
The Hawks might choose a point like H, with many guns and not much butter. The Doves might choose a point like D, with a lot of butter and few guns. If both Hawks and Doves reduced their desired quantity of guns by the same amount, the Hawks would get a bigger peace dividend because the production possibilities frontier is much flatter at point H than at point D.
As a result, the reduction of a given number of guns, starting at point H, leads to a much larger increase in the quantity of butter produced than when starting at point D. See Figure 7. Gains in environmental productivity, such as the development of new way to produce electricity that emits fewer pollutants, lead to shifts of the production-possibilities frontier, like the shift from PPF1 to PPF2 shown in the figure.
Figure 7 Figure 8 4. A: 40 lawns mowed; 0 washed cars B: 0 lawns mowed, 40 washed cars C: 20 lawns mowed; 20 washed cars D: 25 lawns mowed; 25 washed cars b. The production possibilities frontier is shown in Figure 8. Points A, B, and D are on the frontier, while point C is inside the frontier. Larry is equally productive at both tasks. On your website but also on social media. In this review you will find 5 tips from Susanna Florie from her….
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Description Additional information Specifications book-author N. Additional information book-author N. Site Map About Contact. Shopping Cart. We use cookies on our website to give you the most relevant experience by remembering your preferences and repeat visits. However, you may visit "Cookie Settings" to provide a controlled consent. Cookie Settings Accept All. First 3 parts of Microeconomics books are same as Macroeconomics. Both sister books also have the common initial chapters.
In these chapters, the reader gets an overview of what economics is? Then afterwards, there is a division in both the books. Meanwhile, Fourth part deals with the public sector economy. It puts special emphasis on public goods. The tax system affecting the economic power of consumers is also discussed in separate chapter. As, microeconomics studies economy at lower level, there are many chapters on firms.
How the individual industry progresses? What are the factors affecting economy of firms? One can obtain the answer to these questions by reading this text. Competition between firms is now getting fierce with each passing day.
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