Chapter 2: Eight Powerful Ideas
1. It is crucial to clearly discuss the basic paradigm that underlies all that we do in economics. Show what
we mean by scarcity; how scarcity implies the necessity to making choices; how choices imply the
bearing of opportunity costs; and how, when combined with the assumption of self-interest, that results in
2. A useful way to integrate student understanding of how value is created and the crucial role of
entrepreneurship in the process is to show students that all forms of creating value involve one or more of
the following: Resources are being moved from less to more valuable forms (what we typically thing of as
3. A good way to illustrate entrepreneurship to students is to discuss in class how each of them is an
entrepreneur when it comes to discovering the best way to produce higher grades in the course.
Different people learn better in different ways, handle pressure differently, have different attitudes toward
the risk of getting a lower grade if they do less well than expected, different time constraints, etc. Further,
not all courses are the same, and what works well in one course (e.g., memorization of terms) may not
work well in another (e.g., one requiring application). Should you always go to class? Is it more effective
to read before class or after class or not read at all? Should you use a study guide? Should you study in
groups? All these questions are entrepreneurial in nature.
4. A good way to get students thinking about scarcity is to ask them what is scarce when one is dieting.
5. An unusual, literate illustration of scarcity and opportunity cost comes from Homer s Odyssey. In it,
Calypso, the sea princess and immortal child of the gods, envies Ulysses mortality, because he gets to
6. A good opportunity cost illustration is that of celebrities donating their time and services for good
7. Since this chapter introduces appropriate handling of the concept of opportunity cost, it needs to be
emphasized that costs attach to choices, not goods. One effective way to do this in class is to ask “What
is the cost of a car?” One can then lead students to see that their answers do not make sense without a
8. A good, close-to-home illustration of opportunity cost for students is to discuss with them why there is
less dating during finals week, then leading them to see that the reason is that the opportunity cost of time
for dating is higher during finals week than at other times of the school year. Another education
9. A good way to illustrate opportunity cost to students is to ask them whether a human life is of infinite
value. Someone in class is bound to say yes. Then you can show them that saving lives in costly ways
10. There are several ways to illustrate the importance of the rational behavior assumption of economics.
One way would be to show how traditional detective work is an example–the search for a weapon, an
opportunity and a motive presume the criminal is rational. Another way is to ask students for illustrations
that clearly violate rational choice, where the difficulty they have coming up with such illustrations will help
reinforce the power of the assumption of rationality in predicting behavior.
11. A potential mugging illustrates the importance of focusing on the relevant margin with muggers. Say
you are walking through Central Park with $200 in your wallet. When someone tries to mug you, you
12. An interesting illustration of marginal incentives is the case of bounty hunters in the Old West. If a
posse is chasing a bandit who just robbed the local bank, they do not have incentives to catch the bandit
13. You can illustrate the role of incentives by discussing with your class whether you should reward
marginal exam improvement by giving higher grades to the students who improve the most from their first
14. An analogy to the question of whether we want zero pollution discussed in the text is to ask whether
the goal of education is zero ignorance. The answer is no, and for the same reason. The cost of
eliminating some forms of ignorance is greater than the benefits. This can also be extended to show that
one of the advantages of specialization and exchange is the vast saving in the costs of becoming
informed.
15. There are many illustrations that can be used to emphasize the importance of recognizing differences
in the incentive structures that are faced by different parties. Examples include why your athletic team
coach wants you in better shape than you do (he gets some of the benefits, but none of the costs), why
16. A birdwatching analogy can help students see the usefulness of the economic way of thinking. Just
as training and experience shows birdwatchers where to look” and what to look for to spot various birds
17. Another analogy that can help students understand the power of the economic way of thinking is to
the framing of a building: Just as buildings will not be structurally sound if the framing is not done
18. In talking about incentives, one helpful illustration is to show that sometimes it is cheaper to make
mistakes than to be right. This is true whenever the costs associated with being wrong a certain fraction
19. A good way to get students to see that incentives matter is in terms of gold-wired or copper-wired
electric motors. Gold is a better conductor of electricity, so that it is more efficient from an engineering
perspective, but since gold is so much more expensive than copper, copper is typically more
economically efficient for wiring, which is why copper is typically used for that purpose. However, there
are cases, such as in satellites, where gold wiring is used to conserve on even scarcer orbital lift capacity
(to carry the necessary power source or solar power collection devices).
20. One way of introducing the issue of specialization and exchange vs. self sufficiency is to ask students
why people are always portrayed as being so self-sufficient in Westerns, then lead them to see that the
21. A useful connection between property rights and specialization and trade can by made by asking
22. An interesting ethics question can be used in class as an example of specialization and exchange, by
asking why students aren t allowed to buy papers. The reason is that the point of education is more that
23. A good analogy to the importance of the price mechanism as a form of communication is foreign
travel, where one does not speak the language of the country. Ask if any of the students have ever
24. Since most students have heard that market systems built on private property rights are based on the
selfishness of people, it is often interesting to ask students whether market systems are based on
25. One way to get across the idea that our wants will always exceed our productive abilities is to
imagine a genie who gives students a minute to write down their wishes, which he then grants, with the
proviso that they come back in 6 months. Would students discover new wishes in the meantime? If they
produce our way out of scarcity.
26. Another good example of opportunity cost is the cost of going to a particular class meeting. For
27. Choosing a major is a useful example of specialization and trade (including why, in markets systems,
no one needs to force students to choose something they are relatively good at for career preparation)
that students can easily identify with.