CHAPTER 1 - THE ART AND SCIENCE OF

ECONOMIC ANALYSIS (6e)

I. The Economic Problem

Scarce resources v. unlimited wants

ECONOMICS:

A. Resources
1) Categories of resources

a) Labor

b) Capital

c) Land

d) Entrepreneurial ability

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 2) Payments to resource owners

a) Wages for labor

b) Interest for capital

c) Rent for land

d) Profit for entrepreneurship

B. Goods and Services

Resources are combined to produce:

Goods

Services

C. Economic Decision Makers

1) Households (leading role)

2) Firms

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 3) Governments

4) The rest of the world

The economic decision makers interact by

means of markets.

MARKET:

Product market

Resource market

D. A Simple Circular Flow Model

Circular flow model:

Study the diagram on p. 5; be sure you

understand the flows of resources,
products, and money between households
and firms.

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II. The Art of Economic Analysis
Study pp. 6-8 carefully on your own.

Focus on the meaning of marginal analysis (p. 7).

Understand the difference between

microeconomics and macroeconomics (pp. 7-8).

III. The Science of Economic Analysis

Study pp. 8-16 carefully on your own.

Understand the concept of an economic theory or

model (p. 8).

Know the difference between positive and

normative economic statements (p. 10).

Point of interest: The Case Study on p. 14 and

Exhibit 3 on p. 15 show the excellent earning
potential for economics majors (male and female)
compared to many other majors. If you would like
to talk about economics as a possible major for
you, please come by my office—I would be happy
to discuss this with you!

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APPENDIX TO CHAPTER 1 - UNDERSTANDING
GRAPHS

Graph: a picture showing how variables relate

Components of a Graph:

See Ex. 4

Origin - represents zero value for both variables

Horizontal axis - measures values for the variable

“x”

Vertical axis - measures values for the variable “y”

Note: It is often true that one variable depends on

(i.e., is determined by) the other. For example, if
the value of x depends on the value of y, then x is
the dependent variable and y is the independent
variable.

I. Drawing Graphs Based on the Relations Between

Variables

A. Positive (Direct) Relation Between Variables

See Ex. 6, Ex. 7, and Ex. 8(a) for examples

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 B. Negative (Inverse) Relation Between Variables

See Ex. 8(b) for an example

C. Variables may the Independent (Unrelated)

See Ex. 8(c) and 8(d) for examples

II. Slopes of Straight Lines

Slope: how much the vertical axis variable’s value
changes for a given change in the horizontal axis
variable’s value

Slope = change in vertical axis value

change in horizontal axis value

Positive relation  positive slope

See Ex. 8(a)

Negative relation  negative slope

See Ex. 8(b)

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III. Slope, Units of Measurement, and Marginal Analysis
and

IV. Slopes of Curved Lines

Read pp. 21-23. Know how to calculate slopes.

V. Line Shifts

See Ex. 12

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