17
Part 2
Text Overview
This section, which is organized by chapter, has several features. First, an outline of the text is
provided. Second, a brief summary of the important points of each chapter and tips on how best to
use the text and supplementary materials is included. Third, possible answers (or approaches) to
many of the Critical Analysis questions that are not answered in Appendix B of the text are included.
Lastly, fun illustrations and games that have been successfully used to communicate economic
concepts to students are provided.
Chapter 1
The Economic Approach
OUTLINE
I. What Is Economics About?
A. Scarcity Means Having to Make Choices
2. Goods are scarce because desire for them far outstrips their availability in nature.
a. Scarce goods are called economic goods.
3. Scarcity forces us to choose among available alternatives.
B. Scarcity and Poverty Are Not the Same
1. Scarcity and poverty are not the same thing.
2. We may someday eliminate poverty, but scarcity will always be with us.
C. Scarcity Necessitates Rationing
1. Every society must have a method to ration the scarce resources among competing
uses.
a. Various factors can be used to ration (first-come, first-served).
b. In a market setting, price is used to ration goods and resources.
c. When price is used, the good or resource is allocated to those willing to give up
D. Scarcity Leads to Competitive Behavior
2. Changing the rationing method used will change the form of competition, but it will
not eliminate competitive tactics.
II. The Economic Way of Thinking
A. Guideposts to Economic Thinking
1. The use of scarce resources is costly, so tradeoffs must be made.
a. Someone must give up something if we are to have more scarce goods.
2. Individuals choose purposefully; therefore they will economize.
a. Economizing: gaining a specific benefit at the least-possible cost.
3. Incentives Matter
4. Economic reasoning focuses on the impact of marginal changes.
6. In addition to their initial impact, economic events often generate secondary events
that may be felt only with the passage of time.
8. The test of an economic theory is its ability to predict and explain events in the real
world.
III. Positive and Normative Economics
A. Positive Economics
1.
(1) Ex: The inflation rate rises when the money supply is increased
B. Normative Economics
(1) Ex: The inflation rate should be lower.
IV. Pitfalls to Avoid in Economic Thinking
A. Pitfalls
1. Violation of the ceteris paribus condition.
2. Good Intentions Do Not Guarantee Desirable Outcomes
3. Association is not causation.
a. Statistical association alone cannot establish causation.
4. Fallacy of composition
a. The fallacy of composition is the erroneous view that what is true for the
(1) One must beware of the fallacy of composition when shifting from micro to
macro units.
Chapter 1/The Economic Approach 21
OBJECTIVES
The purpose of this chapter is to introduce the student to the economic way of thinking. Unless
students understand the concept of scarcity, the importance of personal incentives, and subject their
thinking to the scientific method, they will do poorly in economics.
Generally, teachers overestimate their students. While many of your students will easily grasp
the basics of the economic way of thinking, others will need additional examples and illustrations
before they understand the essentials. The concepts of scarcity, economizing behavior, and
incentives are so important, they are worth an entire lecture. Use several illustrations to highlight
the impact on human behavior of changes in personal benefits or costs.
Introductory students tend to associate economics with business decision making. We must
illustrate to them that the basic principles of economics and personal incentives influence all of
human decision making, including choices in the political and social spheres. You may also want
to contrast the methodology of economics with that of other social sciences and the physical
sciences. Discuss both the similarities and differences.
IMPORTANT POINTS AND TEACHING SUGGESTIONS
1. Be sure to distinguish clearly between scarcity and poverty (and shortages, once supply and
demand have been covered). Anything that we would like to have more of at no cost is scarce.
2. Introducing the subject of incentives, one can readily emphasize the importance and generality
of this basic principle of economics. When an activity is made more costly, people will be less
likely to choose it. Similarly, when the benefits derived from an event increase, people will be
more likely to undertake it. Numerous examples can illustrate this concept. How does hot
out air-conditioning (or a swimming pool)? How
3. -economic examples to help clarify
the idea. For example, ask students how an additional outstanding running back will influence
the quality of a football team. (This is a marginal change.) If the running back position was
4. A good way of illustrating the search for information is to ask students how long they would
search for a $50 bill. If your time had an opportunity cost of $10, you would look as long as
5. Give examples of actions that have secondary effects. What are the secondary effects of
overeating? Lack of adequate sleep? Restricting trade with Japan? Fixing the price of wheat at
$6 per bushel?
6. Emphasize both the theory and empirical parts of economics. Many professional economists are
engaged in the continual testing of various aspects of economic theory. Discuss how economic
theory is tested. Indicate real-world events that have convinced economists to modify their
theories. Two examples of the latter are:
a. the impact of the Great Depression on the theory that wage and price flexibility quickly
7. Discuss the distinctions between positive and normative economics. Point out that positive
economic statements are testable, whereas normative statements are not. Give several
illustrations of both positive and normative economic statements. The following are examples
of positive economic statements:
a.
b. ts of crude oil will experience inflation when crude
statement.)
c.
The following are examples of normative statements:
8. It is important to emphasize that association is not the same thing as causation. Discuss the
following points with regard to this point.
a. Skirt lengths tend to rise during prosperous times (1920s and 1960s, for example) and fall
9. Provide examples that illustrate the fallacy of composition, such as the following statements:
a. virtually unchanged whether I work or not; thus output is largely
do
11. The Critical Analysis questions at the end of each chapter are very useful in getting students to
12. A bird-watching analogy can help students see the usefulness of the economic way of thinking.
13. Another analogy that can help students see the power of the economic way of thinking is the
framing of a building. Just as buildings will not be structurally sound if the framing is not done
correctly, economic analyses will be faulty unless it is built on the framework of the set of
14. In talking about choices and costs, one helpful illustration is to show that sometimes it is
cheaper to make some mistakes than to be right all of the time. This is true whenever the costs
associated with being wrong a certain fraction of the time are expected to be low compared to
HINTS FOR ANSWERING CRITICAL ANALYSIS QUESTIONS
2. Production of scarce goods always involves a cost; there are no free lunches. When the
6. Self-interest implies neither selfishness nor greed. Neither does it imply that people are only
interested in their own welfare. Self-interest and selfishness do not have the same meaning.