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Twelfth Edition
PART I
INTRODUCTION TO
ECONOMICS
1-1
Principles of Economics
Twelfth Edition(2 of 2)
Chapter 1
The Scope and
Method of Economics
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To Understand Society
Industrial Revolution The period in England during the
late eighteenth and early nineteenth centuries in which
new manufacturing technologies and improved
transportation gave rise to the modern factory system and
a massive movement of the population from the
countryside to the cities.
The study of economics is an essential part of the study of
society.
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To Be an Informed Citizen
To be an informed citizen requires a basic understanding
of economics.
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ECONOMICS IN PRACTICE
iPod and the World
A sticker that says Made in China can often be
misleading.
The iPod is composed of many small parts, and it
is almost impossible to accurately tell exactly
where each piece was produced without pulling it
apart.
From an economics point of view, one often has
to dig deep to see what is really going on.
THINKING PRACTICALLY
1. What do you think accounts for where components of the iPod and Barbie are made?
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ECONOMICS IN PRACTICE
Does Your Part-time Job Matter for Your Academic Performance?
THINKING PRACTICALLY
1. Would the academic outcomes of university juniors change as they become university
seniors if they continuously pursue similar types of employment?
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Economic Policy ( 1 of 3)
Four criteria are important in judging economic outcomes:
1. Efficiency
2. Equity
3. Growth
4. Stability
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Economic Policy (2 of 3)
Efficiency
efficiency In economics, allocative efficiency. An efficient
economy is one that produces what people want at the
least possible cost.
Equity
equity Fairness.
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Economic Policy ( 3 of 3)
Growth
economic growth An increase in the total output of an
economy.
Stability
stability A condition in which national output is growing
steadily, with low inflation and full employment of
resources.
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An Invitation
You cannot begin to understand how a society functions
without knowing something about its economic history and
its economic system.
Learning to think in this very powerful way will help you
better understand the world.
This book proceeds step-by-step, each section building on
the last.
Make sure you understand where it all fits in the big
picture.
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economic growth
economics
efficiency
efficient market
empirical economics
equity
Industrial Revolution
macroeconomics
Marginalism
microeconomics
model
normative economics
Copyright 2017 Pearson Education, Inc.
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CHAPTER 1 APPENDIX:
How to Read and Understand Graphs
graph A two-dimensional representation of a set of
numbers or data.
Time Series Graphs
time series graph A graph illustrating how a variable
changes over time.
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Year
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
Total
Disposable
Personal
Income
1,219
1,326
1,457
1,630
1,809
2,018
2,251
2,425
2,617
2,904
3,099
3,288
3,466
3,770
4,052
4,312
4,485
4,800
5,000
5,244
Year
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
Total
Disposable
Personal
Income
5,533
5,830
6,149
6,561
6,876
7,401
7,752
8,099
8,466
9,002
9,401
10,037
10,507
10,994
10,943
11,238
11,801
12,384
12,508
12,981
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Bottom fifth
2nd fifth
3rd fifth
4th fifth
Top fifth
Average
Income
Before Taxes
Average
Consumption
Expenditures
$ 9,988
27,585
47,265
75,952
167,010
$ 22,154
32,632
43,004
59,980
99,368
A graph is a simple two-dimensional geometric representation of data. The graph in Figure 1A.2
displays the data from Table 1A.2.
Along the horizontal scale (X-axis), we measure household income. Along the vertical scale (Y-axis), we
measure household consumption.
Note: At point A, consumption equals $22,154 and income equals $9,988. At point B, consumption
equals $32,632 and income equals $27,585.
Copyright 2017 Pearson Education, Inc.
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Slope
slope A measurement that indicates whether the
relationship between variables is positive or negative
and how much of a response there is in Y (the variable
on the vertical axis) when X (the variable on the
horizontal axis) changes.
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A positive slope indicates that increases in X are associated with increases in Y and that
decreases in X are associated with decreases in Y.
A negative slope indicates the oppositewhen X increases, Y decreases; and when X
decreases, Y increases.
Copyright 2017 Pearson Education, Inc.
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graph
negative relationship
origin
positive relationship
Slope
X-axis
X-intercept
Y-axis
Y-intercept
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Principles of Economics
Twelfth Edition
Chapter 2
The Economic
Problem: Scarcity and
Choice
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Looking Ahead
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Every society has some system or process that transforms its scarce resources into useful
goods and services.
In doing so, it must decide what gets produced, how it is produced, and to whom it is
distributed.
The primary resources that must be allocated are land, labor, and capital.
Copyright 2017 Pearson Education, Inc.
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ECONOMICS IN PRACTICE
Nannies and Opportunity Costs
The increase in demand for nannies in the
Middle East with an increase in per capita
income is a good example of the role of
opportunity costs in our lives.
From the point of view of policy implication,
the lower opportunity cost of hiring nannies
helps the countries of both the expatriates
and the nanny to generate more income
and higher levels of economic growth.
THINKING PRACTICALLY
1. Under what circumstances could
measuring opportunity costs prevent
you from making a rational decision?
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This figure shows the combinations of food and wood that Colleen and Bill can each generate in one day
of labor, working by themselves. Colleen can achieve independently any point along line ACB, while Bill
can generate any combination of food and wood along line DFE.
Specialization and trade would allow both Bill and Colleen to move to the right of their original lines, to
points like C and F. In other words, specialization and trade allow both people to be better off than they
were acting alone.
Copyright 2017 Pearson Education, Inc.
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The ppf illustrates a number of economic concepts. One of the most important is opportunity cost.
The opportunity cost of producing more capital goods is fewer consumer goods.
Moving from E to F, the number of capital goods increases from 550 to 800, but the number of
consumer goods decreases from 1,300 to 1,100.
Copyright 2017 Pearson Education, Inc.
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Total
Corn Production
(Millions of Bushels per
Year)
Total
Wheat Production
(Millions of Bushels per
Year)
700
100
650
200
510
380
400
500
300
550
Point on ppf
The ppf illustrates that the opportunity cost of corn production increases as we shift resources from
wheat production to corn production. Moving from point E to D, we get an additional 100 million
bushels of corn at a cost of 50 million bushels of wheat.
Moving from point B to A, we get only 50 million bushels of corn at a cost of 100 million bushels of
wheat. The cost per bushel of cornmeasured in lost wheathas increased.
Copyright 2017 Pearson Education, Inc.
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Inefficiency always results in a combination of production shown by a point inside the ppf, like point A.
Increasing efficiency will move production possibilities toward a point on the ppf, such as point B.
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19351939
19451949
19551959
19651969
19751979
19811985
19851990
19901995
1998
2001
2006
2007
2008
2009
a
Wheat
Yield per
Acre
(Bushels)
Labor Hours
per 100
Bushels
Labor Hours
per 100
Bushels
26.1
36.1
48.7
78.5
95.3
107.2
112.8
120.6
134.4
138.2
145.6
152.8
153.9
164.9
108
53
20
7
4
3
NAa
NAa
NAa
NAa
NAa
NAa
NAa
NAa
13.2
16.9
22.3
27.5
31.3
36.9
38.0
38.1
43.2
43.5
42.3
40.6
44.9
44.3
67
34
17
11
9
7
NAa
NAa
NAa
NAa
NAa
NAa
NAa
NAa
Source: U.S. Department of Agriculture, Economic Research Service, Agricultural Statistics, Crop Summary.
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FIGURE 2.7 Economic Growth Shifts the PPF Up and to the Right
Productivity increases have enhanced the ability of the United States to produce both corn and wheat.
As Table 2.2 shows, productivity increases were more dramatic for corn than for wheat.
Thus, the shifts in the ppf were not parallel.
Copyright 2017 Pearson Education, Inc.
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FIGURE 2.8 Capital Goods and Growth in Poor and Rich Countries
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ECONOMICS IN PRACTICE
Trade-Offs among High and Middle-Income Countries in the Middle East
In all societies resources are limited and unable to
satisfy unlimited needs and wants.
The real gross domestic product (GDP or income) of
the UAE is approximately 11 times that of Jordan.
THINKING PRACTICALLY
1.
In what ways do you think the prices of goods are related to the law of
increasing opportunity cost?
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