Instructor’s Resource Manual to accompany Krugman/Wells, Microeconomics in Modules 4e
Revised by Tori Knight
Module 1 krugman 1
Module 1
First Principles
What’s New in the Fourth Edition?
• Worksheets for in-class activities
Module Objectives
This Module will introduce principles of economics.
• How does the invisible hand govern modern economies?
• How can the individual pursuit of self-interest lead to market failures?
• What four principles guide the choices made by individuals?
• What five principles govern how individual choices interact?
• What three principles illustrate economy-wide interactions?
Teaching Tips
The Invisible Hand
Creating Student Interest
• Try opening up the class with questions. For example, ask students if they have made any economic
decisions today? Write down their answers on the chalk/whiteboard. You may get answers that
include purchasing decisions, such as buying a tank of gas on the way to class. You may want to ask
Presenting the Material
• When discussing the definition of economics, make sure students understand that it is a social
science. Ask students to compare the differences between social sciences, like psychology,
sociology, and physical sciences, like chemistry and biology.
Principles that Underlie Individual Choice: The Core of Economics
Creating Student Interest
Instructor’s Resource Manual to accompany Krugman/Wells, Microeconomics in Modules 4e
Revised by Tori Knight
Module 1 krugman 2
• Ask students to identify the resources that they think are scarce, both in their lives and in the world
as a whole. Make a list of these items as they call them out and then discuss the items on the list.
The obvious items will be time and money. You might use this opportunity to point out that it is not
necessarily money that is scarce, but rather income. Other items on the list could include various
natural resources, such as fossil fuels, land, food, and water. You might discuss the idea that water
and land are only scarce in some places or only at some times. Food is not necessarily scarce, but
many people do not have the means or ability to purchase an adequate amount of food.
Regarding the decision to come to class, ask students what the benefits of coming to class are,
particularly on the first day? Then ask them what the costs of coming to class are? Some of them
Presenting the Material
• Emphasize that economics is the study of choices. The choices studied by economists include
choices made by individuals, choices made in markets, and economy-wide choices. While money
and supply and demand are part of what economists study (these two topics are often what students
who haven’t studied economics associate with the discipline), economics deals more broadly with
decision-making (choices). For most people, their earliest economics lesson takes place the first time
they are in a store and their parents tell them no when they ask for something. That’s when they first
learn that you can’t have everything you want (resources are scarce). It can be a difficult lesson (as
you can tell if you have ever witnessed a toddler’s reaction in this situation!).
• Define the four principles of individual choice and note that these principles will appear repeatedly
Interactions: How Economies Work
Creating Student Interest
• Ask students to consider a business run by one person; for example, a law firm. Ask the students
what the lawyer will have to do in addition to trying cases to keep her law firm running. Examples
of these activities could include billing clients, paying the firm’s bills, or keeping the office clean.
Ask the students how the lawyer could bring more revenue into her business, leading them to identify
Instructor’s Resource Manual to accompany Krugman/Wells, Microeconomics in Modules 4e
Revised by Tori Knight
Module 1 krugman 3
hiring other people to take care of billing and cleaning. Use the discussion to highlight the concept
of specialization. The discussion can be expanded to also address why countries trade with one
another.
• Present the famous quote from The Wealth of Nations (1776) by Adam Smith: “It is not from the
benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard
Presenting the Material
• The five principles of market interaction will be explored more thoroughly in future Modules, but
they can be introduced briefly at this point. The motivation for trade is that trade is mutually
beneficial. Use yourself as an example: You teach economics; one of your students can fix
computers. You each specialize and then trade: you teach economics to your student and the student
fixes your computer. As a result, more economics is taught and more computers are fixed. The trade
would not take place if both sides did not benefit.
• Ask students what a t-shirt vendor might do if his t-shirts are not selling because the price is too
high. Students might respond by saying that he should put the t-shirts on sale. Point out that this is a
movement toward equilibrium.
• The idea that resources “should” be used efficiently follows from the economic fact of scarcity.
Because wants are unlimited and resources are scarce, it makes sense to use those resources
efficiently. Efficiency is defined as making the most of the gains from trade given the limited
Economy-Wide Interactions
Creating Student Interest
Instructor’s Resource Manual to accompany Krugman/Wells, Microeconomics in Modules 4e
Revised by Tori Knight
Module 1 krugman 4
• Ask students how they think the U.S. economy is doing now in comparison with past years. Next,
ask them to explain why they answered the way they did. For example, if they gave the economy a
C, why did they assign this grade? If you are teaching macroeconomics you may choose to elaborate
on this topic, or you may defer discussion until you reach the macro Modules. If you are teaching
microeconomics you may prefer to skip the economy-wide principles altogether.
Presenting the Material
• Look up data on recent economic activity (see the Web Resources below for tips on where to find
this information) and present basic information about current GDP, inflation, and unemployment in
comparison with the average long-run values. This will give students a sense of whether the economy
Module Outline
I. The Invisible Hand
A. Economics is the social science that studies the production, distribution, and consumption of
goods and services.
1. A market economy is one in which production and consumption are the result of many
decisions by firms and individuals.
2. The Invisible Hand refers to the way a market economy harnesses self interest for the
good of society.
II. Individual Choice: The Core of Economics
A. Principle #1: Choices are necessary because resources are scarce.
1. Resources include land, labor, physical capital, and human capital.
2. Limited resources means society must make choices.
B. Principle #2: The true cost of something is its opportunity cost.
1. Opportunity cost is not only monetary cost.
C. Principle #3: “How much” is a decision at the margin.
1. Most decisions of interest to economists involve decisions at the margin. An example
is: Should I spend one more hour studying economics or one more hour studying
chemistry?
D. Principle #4: People usually respond to incentives, exploiting opportunities to make
themselves better off.
1. People will exploit opportunities until the opportunities are fully exhausted.
2. People respond to incentives. For example, if the salaries of MBAs rise, more students
will go to business school.
Instructor’s Resource Manual to accompany Krugman/Wells, Microeconomics in Modules 4e
Revised by Tori Knight
Module 1 krugman 5
3. Economists are skeptical of attempts to change people’s behavior that do not change
their incentives.
III. Interaction: How Economies Work
A. An economy is a system for coordinating the productive activities of many people.
B. Principle #5: There are gains from trade.
1. In The Wealth of Nations (1776), Adam Smith wrote about the benefits of
specialization.
C. Principle #6: Markets move toward equilibrium.
1. The fact that markets move to equilibrium is why we can depend on markets to work
in a predictable way.
D. Principle #7: Resources should be used efficiently to achieve society’s goals.
1. When an economy is efficient, it is producing the maximum gains from trade possible,
given the resources available.
2. There are trade-offs between using resources efficiently and attaining equity in the
distribution of goods.
E. Principle #8: Markets usually lead to efficiency.
1. The incentives built into a market economy ensure that resources are usually put to
good use, that all opportunities to make everyone better off have been exploited.
2. The economy as a whole benefits if each individual specializes in a task and trades
with others.
F. Principle #9: When markets don’t achieve efficiency, government intervention can improve
society’s welfare.
1. Markets fail to achieve efficiency for three principal reasons.
a. Individual actions have side effects (externalities) that are not properly taken into
account.
IV. Economy-Wide Interactions
A. The economy as a whole has ups and downs.
1. Economies experience recessions when business becomes depressed.
2. To understand recessions, we need to understand economy-wide interactions.
B. Principle #10: One person’s spending is another person’s income.
C. Principle #11: Overall spending sometimes gets out of line with the economy’s productive
capacity.
D. Principle #12: Government policies can change spending.
1. The government can change its own spending.
2. The government can vary how much it collects from the public in taxes.
3. The government can control the quantity of money in circulation.
Web Resources
Instructor’s Resource Manual to accompany Krugman/Wells, Microeconomics in Modules 4e
Revised by Tori Knight
Module 1 krugman 6
Handout 1-1
Date_________ Name______________________________ Class________ Professor________________
The Opportunity Cost of Attending College
Calculate the annual opportunity cost of attending college based on the following expenses:
Expense
Annual cost ($)
Tuition
8,000
Books and school supplies
1,000
What else should be counted as part of the opportunity cost?
Thinking at the Margin
Hours of advertising
Total customers
0
300
1
350
2
380
4
410
How many hours should a firm advertise based on the information given: a firm finds that its total customers per
week increases as it advertises more hours? Based on this schedule, each extra customer spends an average of $0
at the store, and an extra hour of advertising costs the firm $200/unit.
Housing
5,000
Food
3,000
Entertainment
2,000
Transportation-related expenses
3,000
Instructor’s Resource Manual to accompany Krugman/Wells, Microeconomics in Modules 4e
Revised by Tori Knight
Module 1 krugman 7
Handout 1-2
Date_________ Name______________________________ Class________ Professor________________
Making Choices
Which of the 12 principles is illustrated in each statement?
1. People in Europe drive smaller cars than in the United States because the price of gasoline is higher.
2. You decide to take only three instead of four classes this semester due to your busy work schedule.
________________________________________________________________________________
3. If you take the babysitting job on Friday night, then you will be unable to go to the party with your
friends. ________________________________________________________________________________
4. Jack and Jane are roommates. Jack makes breakfast for both of them each day, and Jane makes dinner for
both of them each day. _________________________________________________________________
5. In most cases, the open checkout lanes at the grocery store all have the same number of customers waiting
to pay for their items. __________________________________________________
6. The U.S. government’s regulation of air pollution has improved the quality of the air over the years.
____________________________________________________________________________________________________
7. The government lowers the income tax rate and, as a result, consumers increase their spending on goods
and services. ___________________________________________________________________________________________
Difficult Choices
Divide into groups and discuss the following scenarios.
1. A society that has 500 children is threatened by a disease that strikes only children. A pharmaceutical
company (owned by stockholders) has manufactured a pill that reduces the chances of getting the disease
from 90% to only 10%. The company is only able to produce 500 pills at the present time. If parents can get
more than one pill it reduces the chance of their child dying. How do you allocate the pills? How do we as a
society preserve incentives for the pharmaceutical firm to take risks and come up with more and/or a better
medicine?
2. Many issues in medicine illustrate scarcity and economic choices. For example, a liver transplant costs
$200,000. Should everyone who has liver disease get the transplant regardless of his or her ability to pay? If
everyone cannot get one, should a very old patient or a young patient get the transplant? As a second example,
Instructor’s Resource Manual to accompany Krugman/Wells, Microeconomics in Modules 4e
Revised by Tori Knight
Module 1 krugman 8
influence their choices. How do the ideas of opportunity cost and making decisions at the margin influence
their choices?