Welcome

Instructor

Maria Fabiana Viola

Office location: HH162
E-mail: m2viola@uwaterloo.ca

Instructional Method
Primarily Lecture format with discussion,

problem sets, and video presentations

Suggestions for the study of economics
1. Read the book before coming to class
2. Reread the book within several hours of class
3. Identify what you dont understand
a) Ask questions in class
b) Go to tutors in supplemental instruction
c) Visit the professor during office hours
Lecture slides presented in class will be posted
on LEARN before class. Problem sets and
multiple choice questions AK will NOT be
posted on LEARN

Roadmap
1. What is Economics
2. Macro vs. Micro
3. Learning Objective #1: develop an economic way of

thinking

4. Learning Objective #2: understand how to measure economic

activity, economic growth, unemployment, and inflation

5. Learning Objective #3: use economic concepts, theories and

principles

6. Learning objective #4: understand fiscal and monetary policy

1. Definition of Economics
Mankiws definition
How Society manages its scarce resources
Hedricks definition
How society chooses to allocate its scarce

resources among competing demands to best

satisfy human wants
Alternative definitions
Economics is the study of choice.
Wikipedia's perspective

1. Definition of Economics
John Maynard Keynes: The theory of
economics does not furnish a body of settled
conclusions immediately applicable to policy.
It is a method rather than a doctrine, an
apparatus of the mind, a technique of
thinking, which helps it possessors to draw
correct conclusions.

1. Definition of Economics
Economics as a Science

Observation Hypothesis Testing

Observation: identifying and measuring
important variables orderly loss of information
Hypothesis: educated guesses about cause and
effect with the variables
Theories
Models: realism or usefulness
Testing: theories cant be proven and are
supported by repeated failed attempts to
disprove them.

1. Definition of Economics
Economics is a social science.

Economists study how individuals, individually

and collectively, make decisions about:
Working and hiring
Buying consumer goods and services
Producing goods and services for sale, setting
prices and reacting to them
Building factories, equipment, and houses
Import goods rather than make them
themselves

2. Macro vs. Micro

Economics is the social science that studies the

choices that individuals, businesses, governments,

and entire societies make as they cope with
scarcity and the incentives that influence and
reconcile those choices.
Economics divides in to main parts:

Microeconomics
Macroeconomics

2. Macro vs. Micro

Microeconomics is the study of choices that

individuals and businesses make, the way those

choices interact in markets, and the influence of
governments.
An example of a microeconomic question is: Why are
people buying more e-books and fewer hard copy
books?
Macroeconomics is the study of the performance of

the national and global economies.

An example of a macroeconomic question is: Why is
the unemployment rate in Canada so high?

3. Learning Objective #1:

Develop an Economic Way
of Thinking
Economics: Studying Choice In a World of

Scarcity
Boundless wants cannot be satisfied with

limited resources. Having more of one thing

usually means having less of another:
because of scarcity we must make choices.

10

3. Learning Objective #1:

Develop an Economic Way
of
Thinking
People
have unlimited wants.
People have limited time, income, wealththey

have limited resources with which to acquire the

things that they want. Therefore, having more of
one thing usually means having less of another.

As a result, they must make choices.

Choices involve pursuing some things while

forgoing others.

11

3. Learning Objective #1:

Develop an Economic Way
of Thinking

Six key ideas define the economic way of thinking:

A choice is a tradeof.

People make rational choices by comparing

benefits and costs.

Benefit is what you gain from something.
Cost is what you must give up to get something.

3. Learning Objective #1:

Develop an Economic Way
Howof
do Thinking
people choose rationally? The answers
turn on benefits and costs.

Benefit: What you Gain

The benefit of something is the gain or pleasure
that it brings and is determined by preferences.
Preferences are what a person likes and dislikes
and the intensity of those feelings.

3. Learning Objective #1:

Develop an Economic Way
Cost:
you Must Give Up
ofWhat
Thinking
The opportunity cost of something is the

highest-valued alternative that must be given up to

get it.
Opportunity cost is the value of what you give up
when a choice is made
What is your opportunity cost of going to an AC/DC concert?

Opportunity cost has two components:

1. The things you cant afford to buy if you purchase the
AC/DC ticket.
2. The things you cant do with your time if you go to the
concert.

3. Learning Objective #1:

Develop an Economic Way
of Thinking"
What is the value of an education?

15

3. Learning Objective #1:

Develop an Economic Way
of Thinking"
What is the value of an education?

16

Benefits

Costs

Higher future income

Tuition, housing, food,

etc.

Personal interest

Interest on student loans

Better career

Lost earnings

3. Learning Objective #1:

Develop an Economic Way
Economic
Surplus
of Thinking
Being self-interested, people will weigh the

costs and benefits of various alternatives,

choosing that alternative that makes them
best off.
Economic Surplus: The benefit of taking any

action minus its cost

The goal of economic decision makers is to

maximize their economic surplus

17

4. Learning Objective #2:

Measure Economic Activity,
Unemployment,
and
Inflation
GDP (real, nominal), GDP
growth
Inflation
Unemployment

5. Learning Objective #3:

Economic Models
Reality is too complex to describe and

explain in one course.

Economists focus on basic relationships

and use these to predict economic events

and formulate economic policies.

19

5. Learning objective #3:

Economic Models
Models
are simplified versions of a more complex
reality
irrelevant details are stripped away

are used to
show relationships (direct, inverse) between

variables (dependent, independent)

explain the economys behavior
devise policies to improve economic
performance
20

5. Learning objective #3:

Economic Models
Ceteris Paribus assumption

The assumption of nothing else changing. It

is an important way of thinking like an
economist.
Short run versus long run

21

5. Learning Objective #3:

Economic Models
Unscrambling Cause and Effect
The task of economic science is to discover positive

statements that are consistent with what we observe

in the world and that enable us to understand how
the economic world works.
Economists create and test economic models.
An economic model is a description of some

aspect of the economic world that includes only those

features that are needed for the purpose at hand.

5. Learning Objective #4: A

Social Science and Policy
Tool

Economist as Social Scientist

Economists distinguish between two types of

statement:

What ispositive statements

What ought to benormative statements

A positive statement can be tested by

checking it against facts.

A normative statement expresses an opinion

and cannot be tested.

6. Learning Objective #4: A

Social Science and Policy
Tool
Economist
as Policy Adviser
Economics is a toolkit for advising governments

and businesses and for making decisions.

All the policy questions on which economists

provide advice involve a blend of the positive and

the normative.
Economics cant help with the normative partthe

goal.

For a given goal, economics provides a

method of evaluating alternative solutions

Roadmap
1. What is Economics
2. Macro vs. Micro
3. Learning Objective #1: develop an economic

way of thinking (Two Big Economic Questions)

4. Learning Objective #2: understand how to
measure economic activity, economic growth,
and control unemployment and inflation
5. Learning Objective #3: use economic concepts,
theories and principles
6. Learning objective #4: understand fiscal and
monetary policy

Q1: Economics is best defined as

__________.
A how people make money and profits in the
stock market
B making choices from an unlimited supply of
goods and services
C making choices with unlimited wants but
facing a scarcity of resources
D controlling a budget for a household

Copyright 2013 Pearson Canada Inc., Toronto, Ontario

Q1: Economics is best defined as

__________.
A how people make money and profits in the
stock market
B making choices from an unlimited supply of
goods and services
C making choices with unlimited wants but
facing a scarcity of resources
D controlling a budget for a household

Copyright 2013 Pearson Canada Inc., Toronto, Ontario

Q2: The loss of the highest-valued

alternative defines the concept of
________.
A benefit
B scarcity
C entrepreneurship
D opportunity cost

Copyright 2013 Pearson Canada Inc., Toronto, Ontario

Q2: The loss of the highest-valued

alternative defines the concept of
________.
A benefit
B scarcity
C entrepreneurship
D opportunity cost

Copyright 2013 Pearson Canada Inc., Toronto, Ontario

Q3: On graduation, you accept a job at CIBC for

$45,000.00 a year. The two other offers you
received were working for Wal-Mart for $38,000 and
working for Ernst and Young for $42,000. Of these
two offers, you would have preferred the job at
Ernst and Young. What is the opportunity cost of
accepting the job at the CIBC?
A The $45,000 you are paid for working at CIBC.
B The $42,000 you would have been paid working
for Ernst and Young
C The $38,000 you would have been paid working
for Wal-Mart.
D The $42,000 you would have been paid working
for Ernst and Young and the $38,000 you would
have been paid working for Wal-Mart
Copyright 2013 Pearson Canada Inc., Toronto, Ontario

Q3: On graduation, you accept a job at CIBC for

$45,000.00 a year. The two other offers you
received were working for Wal-Mart for $38,000 and
working for Ernst and Young for $42,000. Of these
two offers, you would have preferred the job at
Ernst and Young. What is the opportunity cost of
accepting the job at the CIBC?
A The $45,000 you are paid for working at CIBC.
B The $42,000 you would have been paid working
for Ernst and Young
C The $38,000 you would have been paid working
for Wal-Mart.
D The $42,000 you would have been paid working
for Ernst and Young and the $38,000 you would
have been paid working for Wal-Mart
Copyright 2013 Pearson Canada Inc., Toronto, Ontario

Q4: The statement Unemployment should

be kept at or below 5 percent is
__________.
A a positive statement
B a normative statement
C a prediction
D an assumption

Copyright 2013 Pearson Canada Inc., Toronto, Ontario

Q4: The statement Unemployment should

be kept at or below 5 percent is
__________.
A a positive statement
B a normative statement
C a prediction
D an assumption

Copyright 2013 Pearson Canada Inc., Toronto, Ontario