TA的首页中国经济管理大学【MBA课堂】《宏观经济学原理》Chapter 1
中国经济管理大学MBA课堂《宏观经济学原理》Chapter 1: The Scope and Method of Economics
Outline of Text MaterialI. IntroductionHere the authors try to make students aware of how economics relates to their everyday lives. They discuss the interactions between the United States and other countries and compare the United States to other countries. The section concludes with a definition of economics that emphasizes the two fundamental economic problems: scarcity and choice.??? TEACHING TIP: The opening example is a good spot to introduce the subject of globalization. Ask your students what “Made in the U.S.” means. Many will respond that the good has to be manufactured in the United States. Raise the issue of where the parts were made. Quite a few goods that carry the “Made in the U.S.” label are actually assembled in the United States with the components manufactured in other countries. Then move on to a discussion of what it would mean for the United States or any developed economy to consume only what we make. The general answer is higher prices and fewer choices for consumers, but try to get the students to focus on specific goods (bananas and BMWs are two that are easy to understand). ?187 \f "Wingdings 2"?? TEACHING TIP: To help break first-day tensions, try getting your students involved from the start. Ask them to volunteer why they are taking the course. You will get a variety of answers, from the serious (“To understand the world,” “To help me get a good job when I graduate,” “I’m thinking about becoming an economics major”) to the humorous (“My father made me,” “Intro Politics was full”). Some of these answers can prompt further questions: Why might learning economics help you get a job? Why do you think your father wanted you to take this course? The answers can help acquaint the rest of the class with the breadth and practicality of economics.???? TEACHING TIP: Try to get the class thinking in terms of substitutes. Ask them to think about substitutes for water. Most will say there are no substitutes for water. (A few will say beer or wine, but point out that these start as water so they don’t count.) Things that can be used in place of water include plastic bottles of water placed in a toilet tank (reduces volume per flush); shorter showers; and brown lawns. Then point out that if there are substitutes for something as basic as water there almost certainly are substitutes for just about every other economic good. (Wants exceed quantity available for any economic good.)?
II. Why Study Economics?There are four main reasons to study economics:A. To Learn a Way of Thinking ??? TEACHING TIP: Point out to students that economists use common everyday words to mean very specific concepts. The word cost is one example. How is the word used in everyday language? Economists use the word to mean opportunity cost, the cost of choosing one alternative over another. Another example is efficiency. People generally use efficiency to describe any process that’s accomplished with skill and dexterity. Economists mean producing the most output possible from given quantities of resources.?Also described as a way to make decisions, this way of thinking can be described by three fundamental concepts:1. Opportunity Cost: Every decision means giving up something. Economists are fond of trade-offs as a way of thinking about decision making. Taking one action usually means giving up something else. As the text states, “The full cost of making a specific choice includes [the value of] what we give up by not making the alternative choice.” Opportunity cost is the value of the best alternative we forgo when we make a choice. Opportunity costs arise because resources are scarce. Resources are scarce because human wants exceed what we can produce from our current resources.??? TEACHING TIP: Use the following exercise to quickly get across several points concerning opportunity costs. Ask students to think about what they would be doing if they were not in class. (Don’t let them think about this too long or you may find yourself facing an empty classroom!) Make a list of the many suggestions you will receive. (Go back to sleep, sunbathe, read a book.) Answers will vary because tastes vary. Then ask each student to think about the value of that alternative. That value is the opportunity cost of attending class. (Clearly the benefits of attending your class always outweigh the cost!) Point out that measuring opportunity cost is subjective and depends on the perspective of the person making the choice. Conclude by noting that each student cannot have the whole list. Opportunity cost is not the value of all the alternatives forgone. It is the value of the lone second best alternative.???? TEACHING TIP: One example in the text lends itself to further discussion. A firm purchases a piece of equipment for $3,000. Is the opportunity cost of this decision really the interest that could have been earned in a savings account? Get the class to discuss the alternatives available to the firm. Use a computer as a specific example. There might be many alternatives including upgrading the existing computers. The opportunity cost of buying a new computer is the value of whatever alternative is viewed as second-best.6 \f "Wingdings 2" TOPIC FOR CLASS DISCUSSION: Have students discuss the costs of attending college. Most will usually name the explicit costs of tuition, books, etc. Some may note the implicit cost of not working full time. Explore the idea that cost is not always an explicit payment but also a loss. Have students consider what full-time jobs they might have if they were not in college. Make sure the students understand that opportunity costs are real costs. If they had not chosen to attend college, the opportunity cost would have been their net economic gain or loss.?2. Marginalism and Sunk Costs: “Marginal” means a small change. The text uses marginal cost, the cost of increasing production by one unit. This can be illustrated by putting added miles on a car; the change in the odometer reading is the marginal mileage. Sunk costs are costs that cannot be avoided because they have already been incurred.187 \f "Wingdings 2"?? TEACHING TIP: To drive home the importance of marginal analysis, one example can come from the testing requirements you’ve outlined on your syllabus. Ask students to look into the future and imagine they’ve taken three exams and their average is a 78, say two points from a B. Given that their goal is to earn a B, the relevant grade is their grade on the final (fourth) exam; that is, the relevant grade is the marginal grade. At the end of semester, they have no control over what they earned on the first three exams (a sunk cost at this juncture), but they do have some control over their final exam grade.? TOPIC FOR CLASS DISCUSSION: Have students investigate the cost of having resumes printed. They will discover that the price does not double when the quantity does. Why not? Have them relate this to making up flyers to advertise a club or team event. What is the difference between printing 100 or 200? Many will understand that much of the cost is in the initial design, etc. Use this to illustrate sunk costs, costs that have already been incurred, as opposed to marginal costs.0 \f "Wingdings 2" TOPIC FOR CLASS DISCUSSION: The text uses the example of an airline with empty seats. Another example that works well is a hotel with vacant rooms. If someone arrives at 10 p.m. and wants a room, what should they be charged? Students will often refer to the “rack rate.” Point out that a hotel room is very perishable. A room that is empty one night can’t be rented twice the following night. Therefore, the hotel manager should accept any offer that exceeds marginal cost. Marginal costs include cleaning, laundry, and a little bit of power to run the television.?3. Efficient Markets—No Free Lunch: Efficient Markets are markets in which profit opportunities are eliminated rapidly by the actions of those seeking the profits. Use the text’s example of checkout lines at a grocery store to make the point that it is the people seeking the shortest line (express lines not included!) whose actions result in all the lines being of about the same length.??? TEACHING TIP: This is a good point to introduce the economics of information. One of the main factors that causes profit opportunities to persist is slow dissemination of information. Use the example from the text to illustrate the other extreme. If a stockbroker calls with a hot tip, what should you do? The answer in the text—nothing—is correct. Expand on this answer to point out that a phone call is way, way too late. By the time you get the phone call the information has already been disseminated via the Internet and other electronic trading networks. The current price of the stock will already reflect the information, eliminating any chance you might have to earn a profit.?B. To Understand Society: Economic decisions shape the physical environment and influence the character of society. The text cites the examples of the Industrial Revolution and the e-revolution. TOPIC FOR CLASS DISCUSSION: Near the top of the “dot-com” stock market bubble Milton Friedman said he was absolutely sure some dot-com companies would be successful and worth their current valuations, but he was also quite certain he didn’t know which. Ask the class to discuss the impact of the stock market bubble on consumer spending and consumer behavior generally. This is a good time to introduce the differences between income and wealth. You might also point out that the fraction of income spent on consumption is much, much larger than the fraction of wealth that is spent.??? TEACHING TIP: Demonstrate to students that economics is relevant. Bring in the front page from that morning’s newspaper (not the business page), and hold it up to the class. Briefly state how economics can shed light on each of the six or so stories on the front page. This will be easy to do for stories about national health policy, budget deficits, and inflation. But with a little imagination (and good class participation!), you can show how economics relates to virtually any news story. (A cocaine bust? Economics explains why cocaine costs so much and why selling it can be such a lucrative activity for lawbreakers. A war in a faraway region of the world? Economics can help us understand the origins of the conflict, as well as the true cost—the opportunity cost—of a possible U.S. military intervention.)?C. To Understand Global Affairs: No one can understand how countries interact without knowing something about economics. Differences in the levels of material well-being between countries are also better understood using the tools of economics.??? TEACHING TIP: Again, using a newspaper (even a local paper!), demonstrate to students that economics helps in understanding international issues. Can students discern the local impacts of international issues?? TOPIC FOR CLASS DISCUSSION: The countries that are members of the European Economic Union (EU) are not identical to the countries that are members of the European Currency Union (ECU). Ask students why a country (e.g., the United Kingdom) might belong to the EU while rejecting membership in the ECU.?D. To Be an Informed Voter: Many political issues put before citizens for a vote embody economic issues.??? TEACHING TIP: Using the newspaper again, point out that the future of society depends on informed voters. The newspaper merely reports what has happened. An understanding of economics is vital for understanding why things happen and can enable us to make better decisions in solving important social problems. List some of those problems and indicate where they may be covered in more detail later in your course (or other courses).? TOPIC FOR CLASS DISCUSSION: From 1998 to 2001 the U.S. government ran a budget surplus. Since then the government has run a budget deficit. Republicans blame the state of the economy and spending increases (e.g., the war on terrorism) while Democrats blame tax cuts. Who is correct? This is a good place to introduce the idea that the size of the deficit depends on the state of the economy. This is also a good spot to mention the difference between the surplus or deficit and the debt.¾f "Wingdings 2"III. The Scope of EconomicsA. Microeconomics And Macroeconomics: There is both breadth and depth to the field of economics. Students can begin to get a sense of that by considering the two major divisions of economics. However, mention that many economists feel that a good understanding of microeconomics is essential to really learning macroeconomics. Microeconomics studies how individuals and firms make decisions. Macroeconomics studies the behavior of an entire economy.B. The Diverse Fields of Economics: The text lists some fields of specialty in economics (analogous to specialties in medicine).??? TEACHING TIP: Students often think of economics as a rather narrow field. Stress its applicability to the analysis of a wide range of interests and its usefulness in preparing for a variety of graduate degrees. Try discussing the “economic approach” to the pollution problem. Many students and scientists believe pollution control is strictly an issue of regulation and have never thought of the economics that cause pollution in the first place. Drawing on the analogy to medicine, explain why in the current context of managed health care even a premed student would find an economics course helpful! Students who still find the list of topics in the text uninteresting may be intrigued by sports economics (refer them to the Journal of Sports Economics) and studies of the wine industry.?IV. The Method of EconomicsA. Positive Versus Normative Economics: Positive economics studies the way the economic world works. Normative economics uses the results of those studies to make statements about the way the world should work. When economists disagree, the points they argue about are often normative points (differences of opinion and values).??? TEACHING TIP: One of the main contributions of economics to public debate is a clear distinction between positive and normative differences. This separation is often obscured in the media and some other social sciences. Using the morning newspaper, find an economic issue on which government leaders disagree (e.g., the cause of the government budget deficit). Ask students: What sort of positive disagreement might be responsible for the dispute? (There is disagreement over the appropriate size of the budget and the related size of government. This is a good chance to explore the concept of forecasts and the role of assumptions in making them.) Next, make an arbitrary positive assumption (say, about the future course of the economy). Could a normative difference still explain the policy dispute? (One side believes that government is needed to provide more services, the other believes that people should spend their own money not have it spent for them by the government.)?B. Descriptive Economics and Economic Theory: Descriptive economics compiles data and examines it. Economic theory tries to interpret the data to find cause and effect relationships.C. Theories and Models:1. A model is a formal statement of a theory.a. Variable: A measure that can change from time to time or observation to observation.b. Ockham’s Razor: Irrelevant detail should be cut away (but be sure it’s irrelevant!). Formally, Ockham’s Razor says that when there are two equally good explanations of a phenomenon, the simpler of the two should be used.2. Ceteris Paribus: Holding everything else constant. Cet. par. is used to isolate the impact of just one factor.??? TEACHING TIP: This is a good point to introduce the scientific method as used in economics. A researcher develops a model and uses it to produce a series of hypotheses. These hypotheses are then tested statistically using real-world data. A hypothesis that has passed a number of these empirical tests becomes accepted and is called a theory.??? TEACHING TIP: Here’s an interesting exercise to try. Announce a new soft drink, Mocha-Cola, that you intend to market. Which variables do students think will be important in determining the amount of Mocha-Cola that people will want to buy? You will quickly compile a long, but not exhaustive, list. This gives you an excellent excuse to introduce abbreviations. Ask in which way each variable will impact on the consumption of Mocha-Cola. Observe that a specific cause-and-effect pattern is being postulated in each case. If you choose, introduce functional notation at this point, distinguishing between dependent and independent variables, and labeling each independent variable with a positive or negative sign, according to the direction of its effect. (You can introduce the use of graphs here. See the note below under the appendix to this chapter.) Students have now unknowingly constructed a model of consumer behavior. Use this opportunity to underline the point that not all variables have been included in the model and that an all-inclusive list would be cumbersome and distract from the major elements of the model. The values of the variables that you have compiled in your list will be continually changing. Bring out the point that to isolate the effect of any one on the consumption of Mocha-Cola, the ceteris paribus assumption can be invoked. You might suggest the analogy to experiments in the natural sciences, where tightly controlled environments actually make the ceteris paribus assumption a reality.? TOPIC FOR CLASS DISCUSSION: The text uses the example of what determines total miles driven during a time period. The factors listed are number of drivers (driving age, population growth, changes in state laws); the price of gasoline (a complement); household income; number and ages of children; commute distance; location of shopping areas; and availability and quality of public transportation. Make this more specific by using months as the measure of time. Then ask the class for some other factors that might affect average miles driven per month by a household. Two obvious factors are airfares (the price of a substitute) and special events such as September 11, 2001.?3. Expressing Models in Words, Graphs, Equations: Economists use graphs and mathematics to make it more difficult to overlook some effects. One obvious example is income and substitution effects in consumer theory.??? TEACHING TIP: Relate this to how a coach or choreographer might diagram a play or dance routine on a chalkboard to illustrate how the play or routine should work on the field or on stage.???? TEACHING TIP: Use the Mocha-Cola example developed earlier to introduce graphs. You can draw a separate graph of the number of bottles purchased versus two or three of the independent variables that influence consumption. Be sure to select at least one independent variable with a positive relationship to quantity and one with a negative relationship, saving price for last. Explain what it means to move along each of these curves, and what ceteris paribus means in each case.?4. Cautions and Pitfalls:a. Post Hoc Fallacy: Just because event B occurred after event A doesn’t mean that A caused B.??? TEACHING TIP: A few years ago I taught 8:00 a.m. classes five days a week. I got out of bed at 5:30 a.m. Every morning when I got up the sun would be rising. Obviously the act of getting out of bed caused the sun to come up. This example shows two things. First, just because two actions happen together does not mean one caused the other. A theory must be developed that explains why one might cause the other. Second, make sure you have gathered enough data. All I needed to do was include some weekend mornings to refute my hypothesis.?b. Correlation and Causation: Correlation refers to things happening together. Just because two variables move closely together doesn’t mean one causes the other. ??? TEACHING TIP: The text mentions cities with many automobiles and high crime rates. This is an example of a spurious correlation. The true underlying factor is high population density. Since both the number of automobiles and the crime rate is correlated with population density the two appear to be correlated with each other.?c. Fallacy of Composition: What is true for the individual is not true for the group and vice versa.??? TEACHING TIP: Can students find examples of these pitfalls in the model of consumer behavior they constructed for Mocha-Cola? For example, do consumers in the aggregate behave as one individual consumer might? One individual consumer may purchase on impulse, but that is not true in the aggregate. This is a good opportunity to explain what it means to aggregate.?5. Testing Theories and Models: Empirical Economics: The collection and statistical analysis of data to test economic theories is called empirical economics. Researchers look at data collected over time and across different categories or conditions (e.g., age groups, locations) and try to draw conclusions. Controlled experiments are difficult in economics (and other social sciences), but are not impossible.??? TEACHING TIP: See previous; have students develop possible experiments to test their ideas in the model of consumer behavior they constructed using the Mocha-Cola example.???? TEACHING TIP: Mention that the statistical techniques used by economists often implicitly assume each independent variable changes while the others are held constant. These statistical techniques can be used to overcome some of the problems caused by our inability to construct controlled experiments.º"Wingdings 2"D. Economic Policy: Without objectives it’s impossible to come up with policies. Economists have looked at four different criteria for judging outcomes. Using these criteria to evaluate a policy often leads to conflicting recommendations. This is especially true for the first two (efficiency and equity).1. Efficiency is used in the text to mean allocative efficiency. While there are a variety of ways to describe allocative efficiency, the definition students seem to understand best is “producing what people want at the lowest possible cost.”2. Equity means fairness. This is impossible to define universally. An allocation that seems fair to one person will be viewed by another as highly skewed.?»Wingdings 2"? TEACHING TIP: Mention the “law of unintended consequences.” The text discusses rent control. This is a good spot to point out that rent control often hurts the very people it was intended to help.º"Wingdings 2" TOPIC FOR CLASS DISCUSSION: Fairness is often in the eye of the beholder. My favorite exercise to provoke a discussion of fairness is to suggest a grading system for the course in which students with A’s, B+’s, and B’s at the end of the course will have points taken away from them and redistributed to those with C’s, D’s, and F’s. In the end everyone receives a C+. (There is always at least one student who says, “I’ll take it!”) Outline the issues involved. Compare this to the issues involved in income redistribution.? TOPIC FOR CLASS DISCUSSION: Ongoing Congressional debates over tax policy provide a good platform to discuss equity. Is it fair that those with high incomes receive most of the dollars of a tax cut? Point out that these people also pay most of the taxes.?3. Growth is an increase in total output of an economy. Economists often define growth as an increase it output per capita. TOPIC FOR CLASS DISCUSSION: Why does Ireland have such a high rate of growth in recent years? Why has Japan’s growth rate fallen so drastically? In each case, what changed?? TOPIC FOR CLASS DISCUSSION: The text refers to an increase in output per capita as if it automatically becomes an improvement in the standard of living. Ask the class whether they can think of circumstances in which higher output per capita would cause their standard of living to fall. They should come up with higher pollution levels, increased crowding and higher crime rates as items that reduce the standard of living but are not measured in output per capita.?4. Stability means national output is growing at a fairly constant rate from year to year. Inflation is low and the economy is near full employment of resources. TOPIC FOR CLASS DISCUSSION: Assess the current state of the U.S. economy. Have students collect data on growth, inflation, and unemployment.?V. An Invitation: Remember what you’ve learned in previous chapters. You’ll use this material in future chapters.Appendix: How to Read and Understand Graphs??? TEACHING TIP: You must face the unpleasant choice of either boring those who know this material or skipping the material and losing those who have forgotten it. If possible, try to hold a special half-hour section of class and invite those who feel “rusty” with graphs to come for a short review. Passing out an assignment that requires basic graphing skills will encourage those who need the review to attend. Whatever you decide, it’s usually better to include at least a brief review of graphs somewhere in the course.???? TEACHING TIP: Emphasize that the “45˚ line” is simply a graph of y = x. This is especially important in macroeconomics.
Outline of Text MaterialI. IntroductionHere the authors try to make students aware of how economics relates to their everyday lives. They discuss the interactions between the United States and other countries and compare the United States to other countries. The section concludes with a definition of economics that emphasizes the two fundamental economic problems: scarcity and choice.??? TEACHING TIP: The opening example is a good spot to introduce the subject of globalization. Ask your students what “Made in the U.S.” means. Many will respond that the good has to be manufactured in the United States. Raise the issue of where the parts were made. Quite a few goods that carry the “Made in the U.S.” label are actually assembled in the United States with the components manufactured in other countries. Then move on to a discussion of what it would mean for the United States or any developed economy to consume only what we make. The general answer is higher prices and fewer choices for consumers, but try to get the students to focus on specific goods (bananas and BMWs are two that are easy to understand). ?187 \f "Wingdings 2"?? TEACHING TIP: To help break first-day tensions, try getting your students involved from the start. Ask them to volunteer why they are taking the course. You will get a variety of answers, from the serious (“To understand the world,” “To help me get a good job when I graduate,” “I’m thinking about becoming an economics major”) to the humorous (“My father made me,” “Intro Politics was full”). Some of these answers can prompt further questions: Why might learning economics help you get a job? Why do you think your father wanted you to take this course? The answers can help acquaint the rest of the class with the breadth and practicality of economics.???? TEACHING TIP: Try to get the class thinking in terms of substitutes. Ask them to think about substitutes for water. Most will say there are no substitutes for water. (A few will say beer or wine, but point out that these start as water so they don’t count.) Things that can be used in place of water include plastic bottles of water placed in a toilet tank (reduces volume per flush); shorter showers; and brown lawns. Then point out that if there are substitutes for something as basic as water there almost certainly are substitutes for just about every other economic good. (Wants exceed quantity available for any economic good.)?
II. Why Study Economics?There are four main reasons to study economics:A. To Learn a Way of Thinking ??? TEACHING TIP: Point out to students that economists use common everyday words to mean very specific concepts. The word cost is one example. How is the word used in everyday language? Economists use the word to mean opportunity cost, the cost of choosing one alternative over another. Another example is efficiency. People generally use efficiency to describe any process that’s accomplished with skill and dexterity. Economists mean producing the most output possible from given quantities of resources.?Also described as a way to make decisions, this way of thinking can be described by three fundamental concepts:1. Opportunity Cost: Every decision means giving up something. Economists are fond of trade-offs as a way of thinking about decision making. Taking one action usually means giving up something else. As the text states, “The full cost of making a specific choice includes [the value of] what we give up by not making the alternative choice.” Opportunity cost is the value of the best alternative we forgo when we make a choice. Opportunity costs arise because resources are scarce. Resources are scarce because human wants exceed what we can produce from our current resources.??? TEACHING TIP: Use the following exercise to quickly get across several points concerning opportunity costs. Ask students to think about what they would be doing if they were not in class. (Don’t let them think about this too long or you may find yourself facing an empty classroom!) Make a list of the many suggestions you will receive. (Go back to sleep, sunbathe, read a book.) Answers will vary because tastes vary. Then ask each student to think about the value of that alternative. That value is the opportunity cost of attending class. (Clearly the benefits of attending your class always outweigh the cost!) Point out that measuring opportunity cost is subjective and depends on the perspective of the person making the choice. Conclude by noting that each student cannot have the whole list. Opportunity cost is not the value of all the alternatives forgone. It is the value of the lone second best alternative.???? TEACHING TIP: One example in the text lends itself to further discussion. A firm purchases a piece of equipment for $3,000. Is the opportunity cost of this decision really the interest that could have been earned in a savings account? Get the class to discuss the alternatives available to the firm. Use a computer as a specific example. There might be many alternatives including upgrading the existing computers. The opportunity cost of buying a new computer is the value of whatever alternative is viewed as second-best.6 \f "Wingdings 2" TOPIC FOR CLASS DISCUSSION: Have students discuss the costs of attending college. Most will usually name the explicit costs of tuition, books, etc. Some may note the implicit cost of not working full time. Explore the idea that cost is not always an explicit payment but also a loss. Have students consider what full-time jobs they might have if they were not in college. Make sure the students understand that opportunity costs are real costs. If they had not chosen to attend college, the opportunity cost would have been their net economic gain or loss.?2. Marginalism and Sunk Costs: “Marginal” means a small change. The text uses marginal cost, the cost of increasing production by one unit. This can be illustrated by putting added miles on a car; the change in the odometer reading is the marginal mileage. Sunk costs are costs that cannot be avoided because they have already been incurred.187 \f "Wingdings 2"?? TEACHING TIP: To drive home the importance of marginal analysis, one example can come from the testing requirements you’ve outlined on your syllabus. Ask students to look into the future and imagine they’ve taken three exams and their average is a 78, say two points from a B. Given that their goal is to earn a B, the relevant grade is their grade on the final (fourth) exam; that is, the relevant grade is the marginal grade. At the end of semester, they have no control over what they earned on the first three exams (a sunk cost at this juncture), but they do have some control over their final exam grade.? TOPIC FOR CLASS DISCUSSION: Have students investigate the cost of having resumes printed. They will discover that the price does not double when the quantity does. Why not? Have them relate this to making up flyers to advertise a club or team event. What is the difference between printing 100 or 200? Many will understand that much of the cost is in the initial design, etc. Use this to illustrate sunk costs, costs that have already been incurred, as opposed to marginal costs.0 \f "Wingdings 2" TOPIC FOR CLASS DISCUSSION: The text uses the example of an airline with empty seats. Another example that works well is a hotel with vacant rooms. If someone arrives at 10 p.m. and wants a room, what should they be charged? Students will often refer to the “rack rate.” Point out that a hotel room is very perishable. A room that is empty one night can’t be rented twice the following night. Therefore, the hotel manager should accept any offer that exceeds marginal cost. Marginal costs include cleaning, laundry, and a little bit of power to run the television.?3. Efficient Markets—No Free Lunch: Efficient Markets are markets in which profit opportunities are eliminated rapidly by the actions of those seeking the profits. Use the text’s example of checkout lines at a grocery store to make the point that it is the people seeking the shortest line (express lines not included!) whose actions result in all the lines being of about the same length.??? TEACHING TIP: This is a good point to introduce the economics of information. One of the main factors that causes profit opportunities to persist is slow dissemination of information. Use the example from the text to illustrate the other extreme. If a stockbroker calls with a hot tip, what should you do? The answer in the text—nothing—is correct. Expand on this answer to point out that a phone call is way, way too late. By the time you get the phone call the information has already been disseminated via the Internet and other electronic trading networks. The current price of the stock will already reflect the information, eliminating any chance you might have to earn a profit.?B. To Understand Society: Economic decisions shape the physical environment and influence the character of society. The text cites the examples of the Industrial Revolution and the e-revolution. TOPIC FOR CLASS DISCUSSION: Near the top of the “dot-com” stock market bubble Milton Friedman said he was absolutely sure some dot-com companies would be successful and worth their current valuations, but he was also quite certain he didn’t know which. Ask the class to discuss the impact of the stock market bubble on consumer spending and consumer behavior generally. This is a good time to introduce the differences between income and wealth. You might also point out that the fraction of income spent on consumption is much, much larger than the fraction of wealth that is spent.??? TEACHING TIP: Demonstrate to students that economics is relevant. Bring in the front page from that morning’s newspaper (not the business page), and hold it up to the class. Briefly state how economics can shed light on each of the six or so stories on the front page. This will be easy to do for stories about national health policy, budget deficits, and inflation. But with a little imagination (and good class participation!), you can show how economics relates to virtually any news story. (A cocaine bust? Economics explains why cocaine costs so much and why selling it can be such a lucrative activity for lawbreakers. A war in a faraway region of the world? Economics can help us understand the origins of the conflict, as well as the true cost—the opportunity cost—of a possible U.S. military intervention.)?C. To Understand Global Affairs: No one can understand how countries interact without knowing something about economics. Differences in the levels of material well-being between countries are also better understood using the tools of economics.??? TEACHING TIP: Again, using a newspaper (even a local paper!), demonstrate to students that economics helps in understanding international issues. Can students discern the local impacts of international issues?? TOPIC FOR CLASS DISCUSSION: The countries that are members of the European Economic Union (EU) are not identical to the countries that are members of the European Currency Union (ECU). Ask students why a country (e.g., the United Kingdom) might belong to the EU while rejecting membership in the ECU.?D. To Be an Informed Voter: Many political issues put before citizens for a vote embody economic issues.??? TEACHING TIP: Using the newspaper again, point out that the future of society depends on informed voters. The newspaper merely reports what has happened. An understanding of economics is vital for understanding why things happen and can enable us to make better decisions in solving important social problems. List some of those problems and indicate where they may be covered in more detail later in your course (or other courses).? TOPIC FOR CLASS DISCUSSION: From 1998 to 2001 the U.S. government ran a budget surplus. Since then the government has run a budget deficit. Republicans blame the state of the economy and spending increases (e.g., the war on terrorism) while Democrats blame tax cuts. Who is correct? This is a good place to introduce the idea that the size of the deficit depends on the state of the economy. This is also a good spot to mention the difference between the surplus or deficit and the debt.¾f "Wingdings 2"III. The Scope of EconomicsA. Microeconomics And Macroeconomics: There is both breadth and depth to the field of economics. Students can begin to get a sense of that by considering the two major divisions of economics. However, mention that many economists feel that a good understanding of microeconomics is essential to really learning macroeconomics. Microeconomics studies how individuals and firms make decisions. Macroeconomics studies the behavior of an entire economy.B. The Diverse Fields of Economics: The text lists some fields of specialty in economics (analogous to specialties in medicine).??? TEACHING TIP: Students often think of economics as a rather narrow field. Stress its applicability to the analysis of a wide range of interests and its usefulness in preparing for a variety of graduate degrees. Try discussing the “economic approach” to the pollution problem. Many students and scientists believe pollution control is strictly an issue of regulation and have never thought of the economics that cause pollution in the first place. Drawing on the analogy to medicine, explain why in the current context of managed health care even a premed student would find an economics course helpful! Students who still find the list of topics in the text uninteresting may be intrigued by sports economics (refer them to the Journal of Sports Economics) and studies of the wine industry.?IV. The Method of EconomicsA. Positive Versus Normative Economics: Positive economics studies the way the economic world works. Normative economics uses the results of those studies to make statements about the way the world should work. When economists disagree, the points they argue about are often normative points (differences of opinion and values).??? TEACHING TIP: One of the main contributions of economics to public debate is a clear distinction between positive and normative differences. This separation is often obscured in the media and some other social sciences. Using the morning newspaper, find an economic issue on which government leaders disagree (e.g., the cause of the government budget deficit). Ask students: What sort of positive disagreement might be responsible for the dispute? (There is disagreement over the appropriate size of the budget and the related size of government. This is a good chance to explore the concept of forecasts and the role of assumptions in making them.) Next, make an arbitrary positive assumption (say, about the future course of the economy). Could a normative difference still explain the policy dispute? (One side believes that government is needed to provide more services, the other believes that people should spend their own money not have it spent for them by the government.)?B. Descriptive Economics and Economic Theory: Descriptive economics compiles data and examines it. Economic theory tries to interpret the data to find cause and effect relationships.C. Theories and Models:1. A model is a formal statement of a theory.a. Variable: A measure that can change from time to time or observation to observation.b. Ockham’s Razor: Irrelevant detail should be cut away (but be sure it’s irrelevant!). Formally, Ockham’s Razor says that when there are two equally good explanations of a phenomenon, the simpler of the two should be used.2. Ceteris Paribus: Holding everything else constant. Cet. par. is used to isolate the impact of just one factor.??? TEACHING TIP: This is a good point to introduce the scientific method as used in economics. A researcher develops a model and uses it to produce a series of hypotheses. These hypotheses are then tested statistically using real-world data. A hypothesis that has passed a number of these empirical tests becomes accepted and is called a theory.??? TEACHING TIP: Here’s an interesting exercise to try. Announce a new soft drink, Mocha-Cola, that you intend to market. Which variables do students think will be important in determining the amount of Mocha-Cola that people will want to buy? You will quickly compile a long, but not exhaustive, list. This gives you an excellent excuse to introduce abbreviations. Ask in which way each variable will impact on the consumption of Mocha-Cola. Observe that a specific cause-and-effect pattern is being postulated in each case. If you choose, introduce functional notation at this point, distinguishing between dependent and independent variables, and labeling each independent variable with a positive or negative sign, according to the direction of its effect. (You can introduce the use of graphs here. See the note below under the appendix to this chapter.) Students have now unknowingly constructed a model of consumer behavior. Use this opportunity to underline the point that not all variables have been included in the model and that an all-inclusive list would be cumbersome and distract from the major elements of the model. The values of the variables that you have compiled in your list will be continually changing. Bring out the point that to isolate the effect of any one on the consumption of Mocha-Cola, the ceteris paribus assumption can be invoked. You might suggest the analogy to experiments in the natural sciences, where tightly controlled environments actually make the ceteris paribus assumption a reality.? TOPIC FOR CLASS DISCUSSION: The text uses the example of what determines total miles driven during a time period. The factors listed are number of drivers (driving age, population growth, changes in state laws); the price of gasoline (a complement); household income; number and ages of children; commute distance; location of shopping areas; and availability and quality of public transportation. Make this more specific by using months as the measure of time. Then ask the class for some other factors that might affect average miles driven per month by a household. Two obvious factors are airfares (the price of a substitute) and special events such as September 11, 2001.?3. Expressing Models in Words, Graphs, Equations: Economists use graphs and mathematics to make it more difficult to overlook some effects. One obvious example is income and substitution effects in consumer theory.??? TEACHING TIP: Relate this to how a coach or choreographer might diagram a play or dance routine on a chalkboard to illustrate how the play or routine should work on the field or on stage.???? TEACHING TIP: Use the Mocha-Cola example developed earlier to introduce graphs. You can draw a separate graph of the number of bottles purchased versus two or three of the independent variables that influence consumption. Be sure to select at least one independent variable with a positive relationship to quantity and one with a negative relationship, saving price for last. Explain what it means to move along each of these curves, and what ceteris paribus means in each case.?4. Cautions and Pitfalls:a. Post Hoc Fallacy: Just because event B occurred after event A doesn’t mean that A caused B.??? TEACHING TIP: A few years ago I taught 8:00 a.m. classes five days a week. I got out of bed at 5:30 a.m. Every morning when I got up the sun would be rising. Obviously the act of getting out of bed caused the sun to come up. This example shows two things. First, just because two actions happen together does not mean one caused the other. A theory must be developed that explains why one might cause the other. Second, make sure you have gathered enough data. All I needed to do was include some weekend mornings to refute my hypothesis.?b. Correlation and Causation: Correlation refers to things happening together. Just because two variables move closely together doesn’t mean one causes the other. ??? TEACHING TIP: The text mentions cities with many automobiles and high crime rates. This is an example of a spurious correlation. The true underlying factor is high population density. Since both the number of automobiles and the crime rate is correlated with population density the two appear to be correlated with each other.?c. Fallacy of Composition: What is true for the individual is not true for the group and vice versa.??? TEACHING TIP: Can students find examples of these pitfalls in the model of consumer behavior they constructed for Mocha-Cola? For example, do consumers in the aggregate behave as one individual consumer might? One individual consumer may purchase on impulse, but that is not true in the aggregate. This is a good opportunity to explain what it means to aggregate.?5. Testing Theories and Models: Empirical Economics: The collection and statistical analysis of data to test economic theories is called empirical economics. Researchers look at data collected over time and across different categories or conditions (e.g., age groups, locations) and try to draw conclusions. Controlled experiments are difficult in economics (and other social sciences), but are not impossible.??? TEACHING TIP: See previous; have students develop possible experiments to test their ideas in the model of consumer behavior they constructed using the Mocha-Cola example.???? TEACHING TIP: Mention that the statistical techniques used by economists often implicitly assume each independent variable changes while the others are held constant. These statistical techniques can be used to overcome some of the problems caused by our inability to construct controlled experiments.º"Wingdings 2"D. Economic Policy: Without objectives it’s impossible to come up with policies. Economists have looked at four different criteria for judging outcomes. Using these criteria to evaluate a policy often leads to conflicting recommendations. This is especially true for the first two (efficiency and equity).1. Efficiency is used in the text to mean allocative efficiency. While there are a variety of ways to describe allocative efficiency, the definition students seem to understand best is “producing what people want at the lowest possible cost.”2. Equity means fairness. This is impossible to define universally. An allocation that seems fair to one person will be viewed by another as highly skewed.?»Wingdings 2"? TEACHING TIP: Mention the “law of unintended consequences.” The text discusses rent control. This is a good spot to point out that rent control often hurts the very people it was intended to help.º"Wingdings 2" TOPIC FOR CLASS DISCUSSION: Fairness is often in the eye of the beholder. My favorite exercise to provoke a discussion of fairness is to suggest a grading system for the course in which students with A’s, B+’s, and B’s at the end of the course will have points taken away from them and redistributed to those with C’s, D’s, and F’s. In the end everyone receives a C+. (There is always at least one student who says, “I’ll take it!”) Outline the issues involved. Compare this to the issues involved in income redistribution.? TOPIC FOR CLASS DISCUSSION: Ongoing Congressional debates over tax policy provide a good platform to discuss equity. Is it fair that those with high incomes receive most of the dollars of a tax cut? Point out that these people also pay most of the taxes.?3. Growth is an increase in total output of an economy. Economists often define growth as an increase it output per capita. TOPIC FOR CLASS DISCUSSION: Why does Ireland have such a high rate of growth in recent years? Why has Japan’s growth rate fallen so drastically? In each case, what changed?? TOPIC FOR CLASS DISCUSSION: The text refers to an increase in output per capita as if it automatically becomes an improvement in the standard of living. Ask the class whether they can think of circumstances in which higher output per capita would cause their standard of living to fall. They should come up with higher pollution levels, increased crowding and higher crime rates as items that reduce the standard of living but are not measured in output per capita.?4. Stability means national output is growing at a fairly constant rate from year to year. Inflation is low and the economy is near full employment of resources. TOPIC FOR CLASS DISCUSSION: Assess the current state of the U.S. economy. Have students collect data on growth, inflation, and unemployment.?V. An Invitation: Remember what you’ve learned in previous chapters. You’ll use this material in future chapters.Appendix: How to Read and Understand Graphs??? TEACHING TIP: You must face the unpleasant choice of either boring those who know this material or skipping the material and losing those who have forgotten it. If possible, try to hold a special half-hour section of class and invite those who feel “rusty” with graphs to come for a short review. Passing out an assignment that requires basic graphing skills will encourage those who need the review to attend. Whatever you decide, it’s usually better to include at least a brief review of graphs somewhere in the course.???? TEACHING TIP: Emphasize that the “45˚ line” is simply a graph of y = x. This is especially important in macroeconomics.
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