Introduction to Economics for Managers

BUSI 1083

Yorkville University
Ontario Campus

Unit 1: Introduction to Economics;

Economic Theories, Data, and Graphs

Textbook Chapter 1: Economic Issues and Concepts

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and Chapter 2: Economic Theories, Data, and Graphs
 Introduction

• Syllabus-Moodle
• Textbook (Ragan, C. T. S. (2017). Microeconomics (15th Canadian
ed.). Don Mills, Canada: Pearson Education Canada)
• In Class Notes
• Check your calendar for assignments
• E-mail: [email protected]
• LinkedIn: Sujatha Selvaraj
• Office hours: Thursday 2:00pm -3:00pm

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 Chapter Outline/Learning Objectives
Section Learning Objectives
After studying this chapter, you will be able to discuss

1.1 What is Economics? 1. explain the importance of scarcity, choice, and opportunity
cost, and how all three concepts are illustrated by the
production possibilities boundary.

1.2 The Complexity of 2. view the market economy as self-organizing in the

Modern Economies sense that order emerges from a large number of decentralized
decisions.
3. explain how specialization gives rise to the need for trade, and
that trade is greatly facilitated by money.
4. identify the economy's decision makers and see how their
actions create a circular flow of income and expenditure.

1.3 Is There an Alternative to 5. see that all actual economies are mixed economies, having
the Market Economy? elements of free markets, tradition, and government
intervention.
 Economic issues that are of pressing
concern:
• Productivity Growth
• Population Aging
• Climate Change
• Global Financial Stability
• Rising Government Debt
• Globalization

• Many of the challenges we face in Canada and around

the world are primarily economic.
 Weneed
to make
choices on
how to
use
limited
resources
 1.1 What is Economics?
• Economics is the study of the use of scarce resources
to satisfy unlimited human wants.

• Resources

• A society's resources are usually divided into land,

labour, and capital.

• Economists refer to resources as factors of production.

• Outputs are goods (tangibles) or services (intangibles).

 Scarcity and Choice
• Resources can produce only a fraction of the
goods and services desired by people.

• Scarcity implies the need for choice.

• Every choice has an associated cost—opportunity

cost.

• Opportunity cost is defined as the benefit given

up by not using resources in the best alternative
way.
 Fig. 1-1 Choosing Between Pizza and Beer
Consider the choice David must make when he has only has $16 to spend.
He wishes to spend it all on pizza and beer. A beer costs $4 and each slice of
pizza costs $2.

Combination A is unattainable.
Fig. 1-1 Choosing Between Pizza and Beer
• All points that lie on or
inside the line would be
attainable combinations.
• The negatively sloped
A
line provides a boundary
Unattainable combinations
Get 1
extra between attainable and
beer
Give up 2 unattainable
slices of pizza combinations.
Attainable combinations
• The opportunity cost of
getting 1 extra slice of
pizza is half of a beer
that must be given up.
Fig. 1-2 A Production Possibilities Boundary (PPB)
• The PPB illustrates:
– scarcity
– choice
– opportunity cost

Points e and f show scarcity;

they are unattainable with
current resources.
Points a, b, c, d show choice.
They are all attainable, but
which one will be chosen?
The negative slope illustrates
opportunity cost.
 Four Key Economic Problems

1. What Is Produced and How?

– Resource allocation determines the quantities of

various goods that are produced.

– In terms of our previous illustration, what combination

of civilian and military goods will be chosen?

– Will the economy be inside the production possibilities

boundary—inefficiently used resources?
 How do
resources get
allocated?
Suppose I want to distribute
this cake (a “scare resource”)
to the class (the “society
with infinite needs”)
 Four Key Economic Problems
2. What Is Consumed and By Whom?

– What determines how economies distribute total

output? Why do some people get a lot while others
get only a little?

– Will the economy consume exactly what it

produces?

– Microeconomics is the study of the allocation of

resources as it is affected by the workings of the
price system.
 Four Key Economic Problems
3. Why Are Resources Sometimes Idle?

– An economy is operating inside its production

possibilities boundary if some resources are idle.

– Under what circumstances are workers seeking

jobs unable to find them?

– Should governments worry about idle resources?

Is there anything governments can do about it?
 Four Key Economic Problems
4. Is Productive Capacity Growing?
Fig. 1-3 The Effect of Economic Growth on the PPB
– Growth in productive
capacity is shown by an
outward shift of the PPB.
– Point d was initially
unattainable. But after
sufficient growth, it
becomes attainable.

Macroeconomics is the study of determination of economic aggregates.

 Economics and Government Policy
The design and effectiveness of government policy is
relevant to discussing all four problems.
• It can alter the allocation of the economy's resources to
make society as a whole better off.

• It can be used to improve the distribution of consumption

across individuals.

• It is also part of the discussion of why economic resources

are sometimes idle (e.g., unemployment).

• It can affect the overall output and income.

 1.2 The Complexity of Modern Economies

• The Nature of Market Economies

• Self-Organizing

• Who or what provides the goods and services individuals

desire?

• Early economists noticed that the interaction of self-

interested people creates a spontaneous social order—the
economy is
self-organizing.

• Self-interest, not benevolence, is the foundation of economic

order.
 Adam Smith (1723–1790)
In The Wealth of Nations, Smith was the first to develop this
insight fully: "It is not from the benevolence of the butcher, the
brewer, or the baker, that we expect our dinner, but from their
regard to their own interest. We address ourselves, not to their
humanity but to their self-love, and never talk to them of our
own necessities but of their advantages."

Efficiency
Loosely speaking, efficiency refers to organizing available resources
to produce the goods and services that people most value, when
they most want them, and by using the fewest possible resources
to do so.
 The Nature of Market Economies

• Incentives and Self-Interest

– Self-interest guides individuals.

– Individuals respond to incentives.

– Prices and quantities are set in (relatively) free markets

in which individuals trade voluntarily.

– Institutions, created by the state, protect private

property and enforce contractual obligations.
The Decision Makers and Their Choices
• Three broad groups of decision makers:
– Consumers
– Producers
– Government

• In order to achieve their objectives, maximizing

consumers and producers make marginal decisions.
•  they decide whether they will be made better
off by buying or selling a little less of any given
product.
Fig. 1-4 The Circular Flow of Income and Expenditure
 The Flow of Income and Expenditure

• Individuals own factors of production. They sell

the services of these factors to producers in
factor markets and receive payment in return.
• These are the (factor) incomes of individuals.
• Producers transform factor services into goods
and services, which they then sell to individuals
in goods markets, receiving payment in return.
• These are the incomes of producers.
 Production and Trade
• Production usually displays two characteristics noted long ago

by Adam Smith: specialization and division of labour.

• Specialization is the allocation of different jobs to different

people.
• It is more efficient than self-sufficiency because:
– Individual abilities differ—comparative advantage.
– Focusing on one activity leads to improvements — learning by doing.

• Division of labour extends the idea of specialization for the

production of a single good or service.
 Production and Trade

• Money and Trade

• Specialization must be accompanied by trade.

• Money eliminates the cumbersome system of

barter by separating the transactions involved in
the exchange of products, thereby facilitating
specialization and trade.
 Production and Trade
• Globalization

• Underlying modern globalization is the rapid reduction of

transportation and communication costs in the last half of
the 20th century.

• Today, no country can take an isolationist economic stance

and hope to take part in the global economy.

• In this course we will discuss the extent to which the

process of globalization changes markets and changes the
way government policy can influence economic outcomes.
 1.3 Is There an Alternative to the Market
Economy?

• Types of Economic Systems

• There are three pure types of economic systems:
– Traditional

– Command

– Free-Market
• In practice, every economy is a mixed economy, in the
sense that it combines significant elements of all three
systems.
 The Great Debate
• A century after Adam Smith, Karl Marx (1818–
1883) argued that free-market economies could
not be relied upon to generate a "just"
distribution of output.
• He argued the benefits of a centrally planned
system.
• Beginning with the Soviet Union in the 1920s,
many countries inspired by Marx adopted
socialist/communist systems.
 The Great Debate
• By the last few decades of the 20th century, most
of these countries were unable to provide their
citizens the rising living standards that existed in
the more free-market economies.
• In the last two decades of the 20th century, most
governments replaced their systems of central
planning with much freer markets.
 LESSONS FROM HISTORY 1-1
The Failure of Central Planning

• The failure of the centrally planned economies does not

demonstrate the superiority of completely free-market
economies.

• Instead, it shows the superiority of mixed economies,

with large elements of free markets.
 Government in the Modern Mixed Economy

Key government-provided institutions in market economies are

private property and freedom of contract.

Governments also intervene to:

• correct market failures
• provide public goods
• offset the effects of externalities

Markets often work well, but sometimes government policy can improve the outcome
for society as a whole.
 Chapter Outline/Learning Objectives
Section Learning Objectives
After studying this chapter, you will be able to

2.1 Positive and 1. distinguish between positive and normative

Normative Statements statements.

2.2 Building and Testing 2. explain why and how economists use theories to
Economic Theories help them understand the economy.
3. understand the interaction between economic theories
and empirical observation.

2.3 Economic Data 4. identify several types of economic data, including index
numbers, time‐series and cross‐sectional data, and
scatter diagrams.

2.4 Graphing Economic 5. see that the slope of a line on a graph relating two
Theories variables shows how one responds to a small change
in the other.
 2.1 Positive and Normative
Statements
• Normative statements depend on value
judgments and opinions—they cannot be settled
by recourse to facts.

• Positive statements do not involve value

judgments. They are statements about what is,
was, or will be.
 2.2 Building and Testing Economic
Theories
• Theories
• A theory consists of:
– a set of definitions about variables;
– a set of assumptions;
– a set of predictions (or hypotheses).
Fig. 2-1 The Interaction Between Theory and
Empirical Observation
 Rejection Versus Confirmation
A hypothesis can be tested and may be rejected by the
data. This rejection brings the value of the theory into
question.

An alternative is to search for confirming evidence for a

theory.

But no matter how unlikely the theory is, some

confirming evidence can generally be found.
 Statistical Analysis
• Statistical analysis is used to test a hypothesis such as
"if X increases, then Y will also increase."

• Economists are compelled to use millions of

"uncontrolled" experiments going on every day in the
economy.

• These activities can be observed and recorded

continuously, producing a mass of data.

• The analysis of such data requires the use of appropriate

—and often quite complex—statistical techniques.
 Correlation Versus Causation

• Positive correlation means only that X and Y move

together.
• Negative correlation means that X and Y move in
opposite directions.
– But X and Y may not be causally related. Or they may be
related in the opposite way to what is expected—reverse
causality.
– Most economic predictions attempt to establish causality.
Statistical tests often attempt to distinguish between
correlation and causality.
 2.3 Economic Data
• Index Numbers
• Used to compare changes in some variable relative
to some base period.

Value of index in absolute value in given period

= X 100
given period absolute value in base period
Fig. 2-2 Index Values for Steel and Newsprint Output
 Graphing Economic Data
• Economic variables usually come in two basic
forms:
– Cross-sectional data
– Time-series data
• A scatter diagram is a useful and common way
of looking at the relationship between two
variables.
Fig. 2-3 A Cross-Sectional Graph of Average House Prices
for Ten Canadian Provinces, 2015
 2.4 Graphing Economic Theories
• A functional relation can be expressed:
– in a verbal statement
– in a numerical schedule (a table)
– in a mathematical equation
– in a graph

Example:
When income is zero, the person will spend $800 a year, and
for every extra $1 of income the person will increase expenditure
by 80 cents.
C= $800 + 0.8Y
Fig. 2-6 Income and Consumption

Annual Consumption Reference

Income Letter
$ 0 $ 800 p
2 500 2 800 q
5 000 4 800 r
7 500 6 800 s
10 000 8 800 t
 Graphing Functional Relations
• The relationship between two variables may be
positive or negative.

• If the graphs of these relationships are straight

lines, the variables
are linearly related to each other.

• Otherwise, variables are said to be non-linearly

related.
 Four Linear Relationships

Let X be the variable measured on the horizontal axis and Y

the variable measured on the vertical axis.

The slope of a straight line is then Y/X.

A Specific Example
Fig. 2-6 Income and Consumption
 Four Non-Linear Relationships

A minimum

In general, non-linear relations are much more common than

linear ones.
 Learning Activity
• Topic: Elon Musk runs a variety of businesses (Tesla Inc., SpaceX, The Boring
Company, Neuralink, SolarCity (subsidiary of Tesla), OpenAI). Is there an
opportunity cost in running these businesses? Where should Elon Musk
focus in the next few years given the scarcity of resources, and the
opportunity cost he is facing?
• Guidelines:
• Form teams of three
• Use two pieces of paper to right down on each one all your team
members’ names
• Keep notes of the main points you want to raise on the case on both
pieces of paper. You will need to hand in one to your instructor.
• You will have 15 minutes to quickly research and discuss with your team
(you can use your mobile phones for this part of the lecture)
• You will then have 5 minutes to present your ideas
• The final part of the class will be in-class discussion
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