01 Mill Micro1ce PPT ch01

Economics Today
A Canadian Perspective Microeconomics, First Edition
Chapter 1
The Nature of Economics
Copyright © 2023 Pearson Canada Inc. 1-1

Introduction
• The typical age of women getting married rose from
20 in 1950 to 27 today. More women also choose not
to marry at all.
• What accounts for the delayed marriages and
nonmarriages today?
• You will explore this question in this chapter.

Learning Objectives
1.1 Define economics and discuss the difference
between microeconomics and macroeconomics
1.2 Identify the three basic economic questions and the
two opposing sets of answers
1.3 Evaluate the role that rational self-interest plays in
economic analysis
1.4 Explain why economics is a science
1.5 Distinguish between positive and normative
economics

Chapter Outline
1.1 The Power of Economic Analysis
1.2 The Three Basic Economic Questions and Two
Opposing Sets of Answers
1.3 The Economic Approach: Systematic Decisions
1.4 Economics as a Science
1.5 Positive versus Normative Economics
Appendix A: Reading and Working with Graphs

Did You Know That ...
• More than one in four vehicles on Russian roads
are equipped with a dashboard camera?
• Russians have stronger incentives to document auto
accidents that may occur while they are driving.
• The prevalence of icy roads, police corruption, and
faked accidents claims give drivers in Russia strong
incentives to install dashboard cameras.
• In this chapter, you will learn the nature of self-
interested responses to incentives.

1.1 The Power of Economic Analysis (1 of 11)
• Incentives
– Rewards for engaging in a particular activity
– The nature of self-interested responses to incentives is
the starting point for economic analysis

• The economic way of thinking is a framework to

analyze solutions to economic problems:
– How much time to study
– Choosing which courses to take
– Whether the Canadian government should provide
more grants to universities or raise taxes

• The economic way of thinking gives you the power to

reach informed conclusions about what is happening
in the world.
• Economic analysis helps you make better decisions
concerning your career, your education, financing your
home or other important matters.

• Economic analysis is a way of thinking about all

decisions.
• These decisions could be about:
– Your education, career, or financing your home
– Your involvement in the business world
– How you cast your ballot as a voter

• Economics
– The study of how people allocate their limited
resources to satisfy their unlimited wants
– The study of how people make choices
Copyright © 2023 Pearson Canada Inc. 1 - 10

• Resources
– Things that have value and are used to produce goods
and services that satisfy people’s wants
• Wants
– What people would buy if they had unlimited income

• With limited income (resources), people must make

choices to satisfy their wants.
• We never have enough of everything, including time,
to satisfy our every desire.

• Individuals, businesses, and nations face alternatives,

and choices must be made.
• Economics studies how these choices are made.
• Economics examines situations in which individuals
choose how to do things, when to do things, and with
whom to do them.

• Microeconomics
– The study of decision making undertaken by individuals
(or households) and by firms
– Like looking through a microscope to focus on the
smaller parts of the economy:
 The effects of changes in the price of gasoline relative to
that of other energy sources
 The effects of new taxes on a specific product or industry
 If the government establishes new health regulations,
how individual firms and consumers will react to those
regulations

1.1 The Power of Economic Analysis (10 of
11)
• Macroeconomics
– The study of the behaviour of the economy as a whole
– Deals with economy-wide phenomena:
 Changes in unemployment
 The general price level
 The national income
– Macroeconomics deals with aggregates, or totals—
such as total output in an economy
– Modern economic theory blends micro and macro
concepts

• Artificial intelligence (AI) technologies
– The development and implementation of methods of
utilizing automated data-analytics techniques, machine
learning, or virtual- or augmented-reality techniques to
examine and evaluate information in an effort to help
consumers, businesses, and governments to make
decisions.
– Often implements data-analytics methods for working
with very substantial volumes of information, commonly
known as big data, to reveal previously hidden
relationships.

AI—Decision Making Through Data:
Microeconomic and Macroeconomic Applications
• AI technologies can be applied to both microeconomic
and macroeconomic issues.
• At the company level, data-analytics techniques can
be applied to vast amounts of information on product
prices, amounts purchased, and so on.
• Examples of big data analytics that involve economic
aggregates include central banks’ evaluation of
considerable information on price levels, total outputs,
and employment levels.

1.2 The Three Basic Economic Questions
and Two Opposing Sets of Answers (1 of 4)
• Economic system
– The institutional mechanism that determines the way
scarce resources are utilized to satisfy human wants

• Three economic questions:
1. What and how much will be produced?
2. How will items be produced?
3. For whom will items be produced?

• Two opposing answers in the form of economic
systems:
– Centralized command and control (central planning):
Authority that makes all economic decisions
– Price system (market system): Decentralized decision-
making process, in which prices are terms (signals)
under which people agree to make exchanges

• Economic systems of the world’s nations (e.g.,
Canada) are mixed systems that incorporate aspects
of both centralized command and control and a
decentralized price system.

1.3 The Economic Approach: Systematic
Decisions (1 of 7)
• Economists assume that individuals act as if
motivated by self-interest and respond predictably to
opportunities for gain.

Decisions (2 of 7)
“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.”
—Adam Smith, An Inquiry into the Nature and Causes of
the Wealth of Nations, 1776

Decisions (3 of 7)
• Rationality assumption
– The assumption that people do not intentionally make
decisions that would leave them worse off

Decisions (4 of 7)
• Questions:
– Does the fact that some people make apparently
irrational choices invalidate the rationality assumption
in economics?
– Can economic models be applied to situations in which
behaviour is at odds with what we expect from rational
people?

Decisions (5 of 7)
• Responding to incentives
– Rationality and the use of incentives:
 Positive incentives
 Negative incentives
– Making choices:
 Balancing costs and benefits

Decisions (6 of 7)
• Some examples of incentives
– Responding to positive incentives:
 Schoolchildren getting gold stars, working to have a
“better life” for yourself
– Responding to negative incentives:
 Penalties, punishments, using credit cards to avoid
cheque overdrafts

Example: The Incentives to Attend Post-
Secondary Education
• More than half of Canadians (54 percent) have either
college or university qualifications.
• An investment in education will provide the graduate
with a lower unemployment rate, a higher income and
a better quality of life.
• Even though tuition keeps increasing, each year of
additional schooling increases a worker’s earning by
an average of about 10%.

Decisions (7 of 7)
• Defining self-interest
– The pursuit of one’s goals:
 Prestige
 Friendship
 Love
– Does not always mean increasing one’s wealth

Behavioural Example: Assessing Whether
Charitable Donations Reflect Caring for
Others or for Oneself
• For making a charitable donation, people are motivated by
a desire to help others or by the benefit that governments
provide to donors, such as tax deductions.
• Three behavioural economists have found evidence that,
during the years following a damaging earthquake in
Japan, Japan’s taxpayers directed six times the amount of
donations to regions whose governments offered
reciprocal gifts than to areas that offered no gifts.

1.4 Economics as a Science (1 of 9)
• Economics is a social science that employs the same
kinds of methods used in other sciences, such as
biology, physics or chemistry.
• Economics uses models or theories to explain
economic phenomena in the real world.

• Models or theories
– Simplified representations of the real world used as the
basis for predictions or explanations
– Should capture only the essential relationships that are
sufficient to analyze a problem
– Cannot be faulted as unrealistic simply because they
do not capture all details of the real world
 A map is the quintessential model

• Assumptions
– The set of circumstances in which a model is
applicable
– Every model or theory must be based on a set of
assumptions

Example: Getting Directions
• A map is a simplified model of reality.
• The degree of simplification varies across maps;
some contain more detail than others.
• Economic models attempt to focus on what is relevant
to the problem at hand and omit what is not.

• Ceteris paribus [KAY-ter-us PEAR-uh-bus] assumption
– Nothing changes except the factor or factors being
studied
– “Other things constant”
– “Other things equal”

• Economics is an empirical science
– Real-world data are used to evaluate the usefulness of
a model
– Empirical means that evidence (data) is looked at to
see whether we are right
– Economists are often engaged in empirically testing
their models

• Models of behaviour, not thought processes
– Models are useful if they predict economic phenomena
– Economic models predict how people react,
not how they think
– People’s declared preferences are generally of little
use in testing economic theories

What Happens When … people’s actual
reactions to incentives differ from how they
claim they would respond in answers to survey
questions?
• Firms sometimes conduct surveys to try to gauge how
purchases might be affected.
• For instance, a common response people give to a
question about a new fee on baking service is that
they would halt their consumption of the service.
• The declared preferences do not necessarily accord
with their true preferences as many people in fact pay
the new fee and continue to utilize the service.

• Behavioural economics
– An approach to the study of consumer behaviour:
 Emphasizes psychological limitations and complications
that may interfere with rational decision making

• Bounded rationality
– Hypothesis that people are nearly, not fully, rational:
 They cannot examine every choice available to them
 They appear to use rules of thumb to sort alternatives
– Proponents believe that it is “unrealistic” to assume:
 Unbounded selfishness
 Unbounded willpower
 Unbounded rationality

• Rules of Thumb
– A key implication of bounded rationality
– Because every possible choice cannot be considered,
an individual will tend to fall back on methods of
making decisions that are simpler than trying to sort
through every possibility

1.5 Positive versus Normative
Economics (1 of 2)
• Positive economics
– Purely descriptive statements or scientific predictions,
such as “If A, then B”
– A statement of what is
• Normative economics
– Analysis involving value judgments; relates to whether
things are good or bad
– A statement of what ought to be

Economics as It Applies To Your
Everyday Life and Your Future
• You will learn common skills that are practical
• Real Application questions:
– Career choices
– Managerial choices if you decide to go into business
– Future behaviour in your household
– Voting choices

Economics in Your Life: Government
Provides Incentive Program for Zero-
Emission Vehicles (ZEV)
• In 2019, the Ministry of Transport announced how
government investment would make it easier for
Canadians to choose a zero-emission vehicle.
• The government will provide between $2,500 and
$5,000 to consumers who purchase a ZEV.
• Overall, does it appear the incentive to purchase a
ZEV arises from the application of centralized
command and control, the price system or a mix of the
two?

Issues & Applications: Why Education and
Financial Independence Helps to Explain Why
Women are Delaying Marriage and Why Fewer
Women Are Married
• Whether to marry is not only a personal decision but
also a self-interested decision that involves assessing
the economic contributions that a partner has to offer
to a combined household.
• Women have begun placing lower valuations on the
potential economic contributions of partners with lower
education.
• The result has been a reduction in the number of
women who have decided to marry these partners.

Summary Discussion of Learning
Objectives (1 of 5)
1.1 Define economics and discuss the difference
between microeconomics and macroeconomics
– Economics is the study of how individuals make
choices to satisfy wants.
– Microeconomics is the study of decision making by
individual households and individual firms.
– Macroeconomics is the study of nationwide
phenomena, such as inflation and unemployment
levels.

Objectives (2 of 5)
1.2 Identify the three basic economic questions and the
two opposing sets of answers
– The basic economic questions are what, how much,
and for whom items will be produced.
– The two sets of answers are provided by the type of
economic system: centralized command and control
or the price system.

Objectives (3 of 5)
1.3 Evaluate the role that rational self-interest plays in
economic analysis
– Rational self-interest is the assumption that people
never intentionally make decisions that would leave
them worse off.
– Instead, they are motivated mainly by self-interest.

Objectives (4 of 5)
1.4 Explain why economics is a science
– Economists use models, or theories, that are
simplified representations of the real world to analyze
and make predictions about the real world.

Objectives (5 of 5)
1.5 Distinguish between positive and normative
economics
– Positive economics deals with what is, whereas
normative economics deals with what ought to be.
– Positive statements are of the “if … then” variety,
while normative statements ask what “should” or
“ought to” be.

Appendix A: Reading and Working with
Graphs
• Independent variable
– A variable whose value is determined independently of, or outside,
the equation under study
• Dependent variable
– A variable whose value changes according to changes in the
value of one or more independent variables

Appendix A: Direct and Inverse
Relationships
• Direct relationship
– A relationship between two variables that is positive,
meaning that an increase in one variable is associated
with an increase in the other, and a decrease in one
variable is associated with a decrease in the other
• Inverse relationship
– A relationship between two variables that is negative,
meaning that an increase in one variable is associated
with a decrease in the other, and a decrease in one
variable is associated with an increase in the other

Table A-1 Gas Mileage as a Function of Driving
Speed
Kilometres per Kilometres per

Hour Litre
50 14
60 13
70 11
80 9
90 7
100 4
110 1

Figure A-1 Direct and Inverse Relationships

Appendix A: Constructing a Graph
• Number line
– A line that can be divided into segments of equal
length, each associated with a number
• y axis
– The vertical axis in a graph
• x axis
– The horizontal axis in a graph
• Origin
– The intersection of the y axis and the x axis in a graph

Figure A-2 Horizontal Number Line

Figure A-3 Vertical Number Line

Figure A-4 A Set of Coordinate Axes

Appendix A: Graphing Numbers in a
Table
Table A-2 T-Shirts Purchased
(1) Price of (2) Number of T-Shirts

T-Shirts Purchased per Week
$10 20
9 30
8 40
7 50
6 60
5 70

Figure A-5 Graphing the Relationship between T-
Shirts Purchased and Price
Panel (a)
Price per T-Shirts Purchased
T-Shirt per Week Point on Graph
$10 20 I (20, 10)
9 30 J (30, 9)
8 40 K (40, 8)
7 50 L (50, 7)
6 60 M (60, 6)
5 70 N (70, 5)

Figure A-6 Connecting the Observation Points

Figure A-7 A Positively Sloped Curve
Panel (a)
Price per Pairs of Shoes Point on
Pair Offered per Week Graph
$100 400 A (400, 100)
80 320 B (320, 80)
60 240 C (240, 60)
40 160 D (160, 40)
20 80 E (80, 20)

Appendix A: The Slope of a Line (A
Linear Curve)
• Slope
– The change in the y value divided by the corresponding
change in the x value of a curve
– The “incline” of the curve
– “Rise” over “run”

Figure A-8 Figuring Positive Slope

Figure A-9 Figuring Negative Slope

Figure A-10 The Slope of a Nonlinear Curve

Appendix: Summary Discussion of
Learning Objectives (1 of 4)
• Direct and Inverse Relationships
– In a direct relationship, a dependent variable changes
in the same direction as the change in the independent
variable.
– In an inverse relationship, the dependent variable
changes in the opposite direction of the change in the
independent variable.

• Constructing a Graph
– When we draw a graph showing the relationship
between two economic variables, we are holding all
other things constant (ceteris paribus).

• Graphing Numbers
– We obtain a set of coordinates by putting vertical and
horizontal number lines together.
– The vertical line is called the y axis; the horizontal line,
the x axis.

• The Slopes of Linear and Nonlinear Curves
– The slope of any linear curve is the change in the y
values divided by the corresponding change in the x
values as we move along the line, or “rise over run.”
– The slope of a nonlinear curve changes. The slope is
positive when the curve is rising and negative when the
curve is falling. At a maximum or minimum point, the
slope is zero.

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Economics Today

A Canadian Perspective Microeconomics, First Edition

Copyright © 2023 Pearson Canada Inc. 1-1

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Copyright © 2023 Pearson Canada Inc. 1-3

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• The economic way of thinking is a framework to

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• The economic way of thinking gives you the power to

Copyright © 2023 Pearson Canada Inc. 1-8

• Economic analysis is a way of thinking about all

Copyright © 2023 Pearson Canada Inc. 1-9

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• With limited income (resources), people must make

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• Individuals, businesses, and nations face alternatives,

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Kilometres per Kilometres per

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