CHAPTER 1 WHAT IS ECONOMICS?
MASTERY GOALSThe objectives of this chapter are to:
1. Define economics and describe the link between scarcity and the need to make choices. 2. Describe the categories that economists use for classifying resources.
3. Describe the difference between positive and normative economics and explain why
economists don’t always agree. 4. Explain what can be gained from the study of economics. 5. Explain why economists build abstract models.
6. Discuss the two fundamental assumptions, employed in economic model building and
explain how, together, they form the principle of maximization subject to constraints. 7. Explain why economists express their ideas using mathematical concepts and a special vocabulary. 8. Explain why the eight basic principles of economics are so important.
THE CHAPTER IN A NUTSHELL
Economics is the study of choice under conditions of scarcity.
There is a strong link between the concept of scarcity and the need to make choices among alternatives. Chapter 1 explores the concepts of scarce time, scarce spending power, and scarce resources. It introduces the four categories of resources: labor, capital (including physical capital and human capital), land, and entrepreneurship.
The field of economics is divided into two major parts. Microeconomics is concerned with the behavior of individual households, business firms, and governments. Macroeconomics concentrates on the behavior of the economy as a whole. Another useful way to look at economics is to distinguish between positive and normative economics. Positive economics deals with how the economy works, while normative economics uses value judgments to decide what should be. The distinction between positive and normative economics is useful in explaining why economists disagree.
Economics helps us understand the world better, gain self-confidence, achieve social change, and helps us to prepare for many careers, including careers as economists.
Economics relies heavily on models. The chapter explains why it is reasonable and valuable to make simplifying assumptions when building economic models. Two fundamental assumptions underlie economic models: (1) economic decision makers behave as if they are maximizing something; and (2) economic decision makers are subject to constraints that arise
2 Instructor’s Manual for Introduction to Economics, 2e
from scarcity. These two fundamental assumptions comprise the first basic principle of economics: Maximization Subject to Constraints.
Economists often express their ideas using mathematical concepts and a special vocabulary, because these tools enable them to express themselves more precisely than with ordinary language. All of the new terms will be defined and explained as they are introduced. Students are invited to turn to the mathematical appendix at the end of the text to review the basic mathematical tools needed for the course.
Eight basic principles of economics are central to the study of economics and form the foundation on which the rest of economic theory is built. These eight basic principles are:
1. 2. 3. 4. 5. 6. 7. 8. Maximization Subject to Constraints Opportunity Cost
Specialization and Exchange Markets and Equilibrium
Short-run versus Long-run Outcomes Marginal Decision Making Policy Tradeoffs
The Importance of Real Values
The chapter includes a full statement of each of these principles (each is discussed more fully when introduced again, in later chapters).
Finally, it is important to study economics actively rather than passively; active studying means reproducing material, rather than just reading it.
TEACHING TIPS
1. Bill Goffe’s Web site at http://rfe.wustl.edu/EconFAQ.html is a valuable resource for
both students and instructors. A useful assignment is to have students spend twenty minutes or so browsing through this site.
Students should concentrate on “Data” and “Teaching Resources.” You can ask them to find updated figures for things like GDP, the population, labor force participation rates for various groups, and average hourly pay rates, or ask them to browse around until they find something interesting to share with the class—perhaps something that surprised them or they were surprised to find. (Some may even stumble upon JOE and find salary ranges for Ph.D. or ABD economists.) 2. Career information for economists can be found at the Bureau of Labor Statistics Web
site (http://stats.bls.gov/oco/ocos055.htm). Students will be interested to learn that the median annual earnings of economists were $64,830 in 2000. They will also find descriptions of other occupations that economics majors enter. 3. One way to bring economics to life is to spend some time talking about the people who
have won the Nobel prize in economics. Information on Nobel Prize winners can be found at http://www.almaz.com/nobel. For instance, William Vickrey, a 1996 co-winner, proposed, back in 1959, a solution to traffic gridlock: Electronically assessed user fees that discouraged congestion by gradually raising fees, which peaked at times of highest demand. Ronald Coase won the 1991 Nobel prize in economics. His work led to passage of the 1990 Clean Air Act that allows power plants to trade their rights to emit sulfur dioxide. This process cuts pollution in the least expensive way.
Chapter 1: What is Economics? 3
DISCUSSION STARTERS
1. Economics is exciting to teach because there are always so many major news stories to
explain to students in economic terms. Ask students to list some recent news stories and briefly describe for them how an understanding of economics can help them analyze what they have read. If you’re stuck, almost any news story can be linked to the problem of scarcity. 2. Economics can be scary and overwhelming to beginning students. Use the following
common examples to show students that they already apply economic principles every day.
a. When they choose a short line at the campus bookstore checkout counter, they are behaving rationally as they attempt to economize on the scarce resource of time. b. Ask students who have jobs how they schedule their work hours over the course of a given week, or over the course of the year. Very few will choose to work during class hours, and many will not work at all until summer or holiday breaks. This is an example of allocating scarce time.
c. Usually, attendance on the first day of class and on exam days is higher than on other days. This is because the opportunity cost of missing class on these days is higher than on other days. What methods do their professors use to induce attendance? Do these methods alter students’ choices of how to allocate their scarce time? d. Why are they attending college? Many will answer that they attend in order to get a good job in the future. Explain that economists describe this behavior as “human capital investment.” (Human capital is discussed briefly in Chapter 1.)
ANSWERS TO END-OF-CHAPTER QUESTIONS
REVIEW QUESTIONS
1. A resource is anything that is used to produce goods and services. The four types of
resources include labor (the time human beings spend producing goods and services), capital (something produced that is long-lasting, and used to produce other goods), natural resources (land as well as the naturally occurring materials that come with it), and entrepreneurship (the ability and willingness to combine the other resources into a productive enterprise). 2. The level of detail of a model depends on the purpose for which the model is built. In
general, a model should be as simple as possible to accomplish its purpose; this is achieved by including only details that are directly relevant to the study of the question at hand. 3. A simplifying assumption is any assumption that makes a model simpler without
affecting any of its important conclusions, while a critical assumption is any assumption that affects the conclusions of a model in an important way. To use the example from the
经济学导论课件until
