978-1285165905 Chapter 2 Part 2

Chapter 2/Thinking Like an Economist ❖ 25

a. An example of this is a demand curve.

b. The demand curve shows how the quantity of a good a consumer wants to purchase

varies as its price varies, holding everything else (such as income) constant.

D. Slope

1. We may want to ask how strongly a consumer reacts if the price of a product changes.

response to a change in price.

price changes.

2. The slope of a line is the ratio of the vertical distance covered to the horizontal distance

3. A small slope (in absolute value) means that the demand curve is relatively flat; a large slope

(in absolute value) means that the demand curve is relatively steep.

E. Cause and Effect

1. Economists often make statements suggesting that a change in Variable A causes a change

in Variable B.

2. Ideally, we would like to see how changes in Variable A affect Variable B, holding all other

variables constant.

3. This is not always possible and could lead to a problem caused by omitted variables.

Figure A-4

Figure A-5



slope =

y

x

Figure A-6

26 ❖ Chapter 2/Thinking Like an Economist

b. But, if Variable C has also changed, it is entirely possible that Variable C is responsible for

the change in Variable B.

4. Another problem is reverse causality.

b. However, it is entirely possible that the change in Variable B led to the change in Variable

A.

expected change in Variable B.

SOLUTIONS TO TEXT PROBLEMS:

Quick Quizzes

1. Economics is like a science because economists devise theories, collect data, and analyze the data in

an attempt to verify or refute their theories. In other words, economics is based on the scientific

method.

Figure A-7

There are two very good examples in the text that you should use in class. To

discuss the omitted variable problem, point out to students that a rise in the sales of

cigarette lighters is positively related to the number of individuals diagnosed with

lung cancer. To discuss reverse causality, show that an increase in minivan sales is

followed by an increase in birth rates.

Chapter 2/Thinking Like an Economist ❖ 27

Figure 1

2. An example of a positive statement is “a higher price of coffee causes me to buy more tea.” It is a

positive statement because it is a claim that describes the world as it is. An example of a normative

Parts of the government that regularly rely on advice from economists are the Department of the

Treasury in designing tax policy, the Department of Labor in analyzing data on the employment

28 ❖ Chapter 2/Thinking Like an Economist

situation, the Department of Justice in enforcing the nation’s antitrust laws, the Congressional Budget

Office in evaluating policy proposals, and the Federal Reserve in analyzing economic developments.

Many other answers are possible.

3. Economic advisers to the president might disagree about a question of policy because of differences

in scientific judgments or differences in values.

Questions for Review

1. Economics is like a science because economists use the scientific method. They devise theories,

2. Economists make assumptions to simplify problems without substantially affecting the answer.

3. An economic model cannot describe reality exactly because it would be too complicated to

4. There are many possible answers.

6. Figure 3 shows a production possibilities frontier between milk and cookies (

PPF

1). If a disease kills

after the disease hits.

Figure 3

7. An outcome is efficient if the economy is getting all it can from the scarce resources it has available.

In terms of the production possibilities frontier, an efficient point is a point on the frontier, such as

Chapter 2/Thinking Like an Economist ❖ 29

as point B, is inefficient since more of one good could be produced without reducing the production

of another good.

Figure 4

8. The two subfields in economics are microeconomics and macroeconomics. Microeconomics is the

study of how households and firms make decisions and how they interact in specific markets.

Macroeconomics is the study of economy-wide phenomena, including inflation, unemployment, and

economic growth.

keep the growth rate of money low.

10. Economists sometimes offer conflicting advice to policymakers for two reasons: (1) economists may

disagree about the validity of alternative positive theories about how the world works; and

30 ❖ Chapter 2/Thinking Like an Economist

Quick Check Multiple Choice

Problems and Applications

to produce one more unit of butter is increasing.

Figure 6

c. The Hawks might choose a point like H, with many guns and not much butter. The Doves might

choose a point like D, with a lot of butter and few guns.

d. If both Hawks and Doves reduced their desired quantity of guns by the same amount, the Hawks

32 ❖ Chapter 2/Thinking Like an Economist

3. See Figure 7. The shape and position of the frontier depend on how costly it is to maintain a clean

environmentthe productivity of the environmental industry. Gains in environmental productivity,

Figure 7 Figure 8

4. a. A: 40 lawns mowed; 0 washed cars

c. Larry is equally productive at both tasks. Moe is more productive at washing cars, while Curly is

d. Allocation C is inefficient. More washed cars and mowed lawns can be produced by simply

reallocating the time of the three individuals.

b. The effect of government regulations on auto emissions is related to microeconomics.

c. The impact of higher saving on economic growth is related to macroeconomics.

e. The relationship between the inflation rate and changes in the quantity of money is related to

macroeconomics.

Chapter 2/Thinking Like an Economist ❖ 33

positive statement. It deals with how the economy

is

, not how it should be. Since economists

have examined data and found that there is a short-run negative relationship between inflation

and unemployment, the statement is a fact.

c. The statement that the Federal Reserve should reduce the rate of money growth is a normative

statement. It states an opinion about something that should be done, not how the world is.

d. The statement that society ought to require welfare recipients to look for jobs is a normative

e. The statement that lower tax rates encourage more work and more saving is a positive

So the statement reflects how the world is and is thus a positive statement.