The Study of Economics

Module 1 The Study of Economics Module Objectives Students will learn in this module: How scarcity and choice are central to the study of economics. The importance of opportunity cost in individual choice and decision making. The difference between positive economics and normative economics. When economists agree and why they sometimes disagree. What makes macroeconomics different from microeconomics. Module Outline I. Individual Choice: The Core of Economics A. Definition: Economics is the study of scarcity and choice. B. Definition: Individual choice is decisions by individuals about what to do, which necessarily involve decisions about what not to do. C. Definition: An economy is a system for coordinating a society s productive and consumptive activities. D. Definition: In a market economy, the decisions of individual producers and consumers largely determine what, how, and for whom to produce, with little government involvement in the decisions. E. Resources are scarce. 1. Definition: A resource is anything that can be used to produce something else. 2. The economy s resources, or factors of production, can be classified into four categories. a. Definition: Land refers to all resources that come from nature, such as minerals, timber, and petroleum. b. Definition: Labor is the effort of workers. c. Definition: Physical capital refers to manufactured goods used to make other goods and services. d. Definition: Human capital refers to the educational achievements and skills of the labor force, which enhance its productivity. 3. Definition: A scarce resource is not available in sufficient quantities to satisfy all the various ways society wants to use it. 4. Limited resources means society must make choices. 1

2 module 1 the study of economics F. The real cost of something is what you must give up to get it. 1. Definition: The real cost of an item is its opportunity cost: what you must give up in order to get it. 2. Opportunity cost is not only monetary cost. II. Microeconomics Versus Macroeconomics A. Definition: Microeconomices is the study of how people make decisions and how those decisions interact. B. Definition: Macroeconomics is concerned with the overall ups and downs in the economy. C. Definition: Economic aggregates are economic measures that summarize data across many different markets. D. Microeconomic questions are different from macroeconomic questions. III. Positive Versus Normative Economics A. Definition: Positive economics is the branch of economic analysis that describes the way the economy actually works. B. Definition: Normative economics makes prescriptions about the way the economy should work. C. Models are especially helpful in answering what if questions such as, How will revenues change with a tax cut? The answer is a predictive one, not prescriptive; it does not tell you if the policy is good or bad. D. Economists do engage in normative economics. Economic analysis can be used to show that some policies are clearly better than others, especially if one solution is more efficient than another. For example, most economists would favor subsidies to renters over rent control laws as a more efficient solution. IV. When and Why Economists Disagree A. Because economists have used different models and made differing simplifying assumptions, they can arrive at different conclusions. B. Many disagreements are eventually resolved by the accumulation of evidence. C. Economic analysis is a method, not a set of conclusions. Teaching Tips Individual Choice: The Core of Economics Creating Student Interest Ask students if they have made any economic decisions today? Some will pause over the word economic and wonder if they really have made any economic decisions. Others will say they came to class, they got up, or they decided what to have for breakfast. This is a good opportunity to point out that economic decisions do not have to involve business or money. Decisions must be made because resources are scarce. 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

module 1 the study of economics 3 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? Now ask them what the costs of coming to class are? Some of them may think of monetary costs, such as tuition, books, or the parking permit they had to buy. Others may realize that there were other things they could be doing with their time. Use this example to discuss the difference between explicit and implicit cost, and the concept of opportunity cost. 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 a 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). Most people s first economics lesson comes the first time they are in a store and are told no when they tell their parents they want 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!). Economics is a social science. Ask the students to name other social sciences. You might have a building on campus or a curriculum requirement that can help them identify the social science disciplines. Ask students what social sciences have in common (answer: people). Discuss how economics is similar to the other social science disciplines and how it is different. Here you can bring up what economics has in common with the sciences and prepare students for the use of math (graphs) and models in the course. Finally, be certain that students understand that economics is an approach to decision making, and not a list of items to be memorized. A quote from John Maynard Keynes can be helpful: The Theory of Economics does not furnish a body of settled conclusions immediately applicable to policy. It is a method rather than a doctrine, an apparatus of the mind, a technique of thinking which helps its possessor to draw correct conclusions. (From The General Theory of Employment, Interest, and Money) Microeconomic Versus Macroeconomics Creating Student Interest Present the basic definitions of microeconomics and macroeconomics. Now see if students can think of examples of questions that would be studied in microeconomics and macroeconomics. Depending on what they say, add questions of your own to round out the list. A second idea is to bring in a copy of the newspaper and highlight the different micro and macro questons in the news that day. This has the added benefit of highlighting the importance of studying economics in terms of being able to better understand what is going on in the world. Presenting the Material Direct students attention to the Microeconomic Versus Macroeconomic Questions listed in the text. Have them compare their earlier responses regarding the differences between microeconomics and macroeconomics with the specific questions listed in this table.

4 module 1 the study of economics Microeconomic Versus Macroeconomic Questions Microeconomic Questions Should I go to business school or take a job right now? What determines the salary offered by Citibank to Cherie Camajo, a new Columbia MBA? What determines the cost to a university or college of offering a new course? What government policies should be adopted to make it easier for low-income students to attend college? What determines whether Citibank opens a new office in Shanghai? Macroeconomic Questions How many people are employed in the economy as a whole this year? What determines the overall salary levels paid to workers in a given year? What determines the overall level of prices in the economy as a whole? What government policies should be adopted to promote employment and growth in the economy as a whole? What determines the overall trade in goods, services, and financial assets between the United States and the rest of the world? Positive Versus Normative Economics Creating Student Interest Find an estimate of the average annual tuition at your institution. Write the estimate on the board and tell students you want them to know two things about this number (write them on the board): First, it is the average annual tuition at your institution. Second, this amount is too low. Tell them to write down the two statements. This should cause one or more students to express disagreement with at least one of the statements. If not, ask them if they agree with them or not (and why). Use the statements as a lead-in to your presentation of positive versus normative in economics. Ask students to make a clearly biased statement concerning the economy. Then ask them to make a perfectly objective statement. Presenting the Material After explaining the difference between positive and normative, quiz the class by asking them to determine if each of the following statements is positive or normative. If a student identifies the statement as positive, ask how the statement could be tested. Remind them that a positive statement need not be correct, it only needs to be testable. Also remind them that even if everyone agrees with a normative statement, it is still normative. The price of gas is too high. (Normative: what is too high?) The Federal Reserve lowered interest rates yesterday. (Positive: you can test this by going to the Federal Reserve s website or by looking at interest rates.) The national debt should be reduced. (Normative: How can you know/test what should be done?) Foreign imports are bad for the economy. (Normative: How do you define bad?) Inflation is expected to rise. (Positive: You can survey people and see/test whether they expect inflation to rise)

module 1 the study of economics 5 Common Student Pitfalls Understanding what the economics discipline is about. Students often think that economics is about money and that an economics course will teach them how to make money. Point out that economics is about choices, and while some choices involve money and monetary values, many choices (like whether to attend class or sleep in) do not. Accepting that resources are scarce and/or that wants are unlimited. Some students have trouble with the ideas that resources are scarce (especially given the affluence of the U.S. economy) and that wants are unlimited. For both of these ideas, use time as an example. Time is always limited and while a person may not want more goods, they would certainly like to have more time (for instance, to spend with friends and family or devote to a favorite cause). Case Studies in the Text Economics in Action Got a Penny This EIA evaluates the costs and benefits of using pennies and presents the possibility that the costs of using pennies outweigh the benefits. When Economists Agree This EIA discusses a survey of economists that found there was actually widespread agreement among economists on many issues. Activities Opportunity Cost (5 10 minutes) Have students identify some of the decisions they have made in the last few days. Next ask them to identify the opportunity cost of making this decision. Make sure they identify both monetary and nonmonetary costs. This activity can be done by students working in groups, or it can be done as a class activity. Difficult Choices (10 20 minutes) Form students into pairs or teams, then present one of the following scarcity scenarios. 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, we now have the technology to save premature babies who are below 1,000 grams in weight despite a high probability that these children will be handicapped. Should we use society s scarce medical resources to save them? These issues illustrate tough economic choices involving health care. One of the most immediate economic choices for many college students is how many hours per week to work for pay and how many hours to spend studying and attending classes. Pair students and ask them what factors influence their choices. How do the ideas of opportunity cost and making decisions at the margin influence their choices? Positive or Normative? (3 5 minutes) Read the following sentences to the class, and ask students to label each one as normative or positive: More than 60% of women are in the labor market. (positive)

6 module 1 the study of economics Rent control laws should be implemented because they help to achieve equity or fairness in housing. (normative) Society should take measures to end gun violence. (normative) People who smoke pass on increased medical costs to the whole society. (positive) Single mothers are more than twice as likely as married mothers to be in poverty. (positive) Change It to Normative (5 10 minutes) Pair students. Ask one student in each pair to write a positive economic statement of fact, and the other student to rewrite the statement as a normative one. Ask a few pairs to report. Web Resources The following websites provide data related to the current state of the economy. Data for unemployment rates in local areas can be found on the Bureau of Labor Statistics (BLS) website. http://www.bls.gov/lau/ The BLS Consumer Price Index web page provides data for inflation rates. http://www. bls.gov/cpi/ The Bureau of Economic Analysis provides data for GDP growth rates. http://www.bea. gov/index.htm The following BLS website contains labor force participation data for men and women from 1975 2008. http://www.bls.gov/opub/working/page3b.htm