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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.
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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
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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.
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Microeconomic Versus Macroeconomic Questions
Microeconomic Questions
Macroeconomic Questions
Should I go to business school or take a job
right now?
How many people are employed in the
economy as a whole this year?
What determines the salary offered by Citibank
to Cherie Camajo, a new Columbia MBA?
What determines the overall salary levels paid
to workers in a given year?
What determines the cost to a university or
college of offering a new course?
What determines the overall level of prices in
the economy as a whole?
What government policies should be adopted
to make it easier for low-income students to
attend college?
What government policies should be adopted
to promote employment and growth in the
economy as a whole?
What determines whether Citibank opens a new
office in Shanghai?
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)
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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)
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• “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