Exploring Economics 1
Chapter Overview
The chapter begins with material about economics in general, almost immediately
introducing the student to the tradeoff between efficiency and equity. Ten key ideas
of economics are then introduced and discussed.
Chapter Outline
What Is Economics About?
Microeconomics versus Macroeconomics
Economic Theories and Reality
Model Building
Ceteris Paribus: All Else Held Constant
Efficiency versus Equity
Checkpoint: What Is Economics About?
Key Ideas of Economics
Choice and Scarcity Force Tradeoffs
Opportunity Costs Dominate Our Lives
Issue: Do Hummingbirds Make Good Economists?
Rational Behavior Requires Thinking at the Margin
People Follow Incentives
Markets Are Efficient
Government Must Deal with Market Failure
Information Is Important
Specialization and Trade Improve Our Lives
Productivity Determines Our Standard of Living
Government Can Smooth the Fluctuations in the Overall Economy
Checkpoint: Key Ideas of Economics
Appendix: Working With Graphs and Formulas
1
,2 Chapter 1 / Exploring Economics
Ideas for Capturing Your Classroom Audience
■ Talk about choices. Using either small groups or the class as a whole, develop a
list of choices students have made, including their choice to take your class! Keep
the list available for reference when you discuss the key ideas of economics
detailed in this chapter. Discuss similarities and differences to illustrate how eco-
nomics can account for the individual and the collection of individual choices.
You may also want to consider a follow-up assignment in which students are
asked to relate the key ideas to the choices they make every day, with particular
emphasis on developing a consciousness of opportunity cost and thinking at the
margin.
■ Bring the global economy into your classroom. Ask students where many of the
goods they use were made. The example of iPods can be used to illustrate a busi-
ness decision about where to produce a product (in this case, China) based on
cost. This also allows for a discussion of globalization, outsourcing, and issues
of worker exploitation. Have students use a search engine such as Google and
use the key words “iPods where made.” A number of sources will pop up, includ-
ing the article at http://www.scribd.com/doc/969788/Why-iPods-Are-Made-in-
China that clearly explains the cost advantages and trade aspects. Other articles
of interest include those that explore what a “fair trade” iPod would cost.
Chapter Checkpoints
What Is Economics About?
Question: In each situation below, determine whether it is a microeconomic or
macroeconomic issue.
1. Hewlett-Packard announces that it is lowering the price of printers by 15%.
2. The president proposes a tax cut.
3. You decide to look for a new job.
4. The economy is in a recession and the job market is bad.
5. The Federal Reserve announces that it is raising interest rates because it
fears inflation.
6. You get a nice raise.
7. Average wages grew by 2% last year.
Suggested Answers:
MICRO issues (1, 3, 6); MACRO issues (2, 4, 5, 7)
The point is to check that students can: determine whether the issue deals with an
individual, firm, or industry (and how they make decisions) and thus is a MICRO
issue or whether it focuses on broader economic issues such as inflation, employ-
ment and unemployment, and economic growth, and thus is a MACRO issue. Be
alert to the fact that students may catch on to the pattern (i.e., micro issues have
odd numbers and macro issues have even numbers) and so have the correct answer
without understanding the economics!
For the MICRO issues (1, 3, 6): Emphasize the “you” (meaning the individual) in
issues 3 and 7, and the individual company noted in issue 1.
, Chapter 1 / Exploring Economics 3
For the MACRO issues (2, 5, and 7): Students may identify the terms “recession” and
“inflation” in issues 4 and 5, but the macro aspects of a “tax cut” and “average
wages” in issues 2 and 7 may not be as obvious.
The “couplets” of answers 3 and 4 and 6 and 7 provide good opportunities to point
up the relationship and differences between macro and micro.
Key Ideas of Economics
Question: McDonald’s has recently introduced a premium blend of coffee that sells
for more than its standard coffee. Does this represent thinking at the margin?
Suggested Answer: Yes it does. McDonald’s is adding one more product (premium
coffee) to its product line. Thinking at the margin entails thinking about how you
can improve an operation (or increase profits) by adding to your existing product
line, reducing costs, or many other outcomes.
The point is to check that students can apply the idea of thinking at the margin to
a real-world business decision. Students will likely identify that this is an attempt by
McDonald’s to compete with Starbucks and Dunkin’ Donuts (and any other coffee
sellers in the area of their stores). The emphasis here is that firms use marginal con-
cepts in making decisions: what is the marginal revenue from one more product or
even one more cup of coffee sold? What is the marginal cost? Students may identify
that once the equipment is installed the additional costs of brewing more cups
depends only on the ingredients used.
Debate the Issues
Issue: Do Hummingbirds Make Good Economists?
Black-chinned hummingbirds in the Sonoran desert of Arizona demonstrate behav-
ior that makes perfect sense to an economist: they exert more effort into protecting
a rich source of food than they do for a less favorable source.
A number of studies have explored whether animals engage in what economists call
rational behavior. See, for example, the study on rats by Aaron P. Blaisdell
(“Rational Behavior in Rats,” (January 2010, on the web site of the American
Psychological Association, accessed 04/02/2010 at http://www.apa.org/science/
about/psa/2010/01/sci-brief.aspx).
You can use this study as the basis for a discussion about the idea of rational choice
and to debate whether “rational” behavior is possible only for humans. Explore how
economics intersects with other social sciences.
Here’s another interesting topic: Jennifer Brown (an applied macroeconomist at the
Kellogg School of Management, Northwestern University) has studied the impact of
the participation of golf superstars on other top players in tournaments. Her findings
suggest that non-superstars, knowing they are not likely to win because of the partici-
pation of superstars, don’t seem to perform as well as they have in tournaments in
which superstars have not played. See the story about Brown’s work by Jonah Lehrer
(Wall Street Journal, April 3, 2010, p. W1), which is available on the Web at:
http://online.wsj.com/article/SB10001424052702303960604575158122511930684
.html
, 4 Chapter 1 / Exploring Economics
For the PDF of the Brown article, visit http://are.berkeley.edu/~brown/Brown%
20-%20Competing%20with%20 Superstars.pdf
Examples Used in the End-of-Chapter Questions
Question 3 presents an opportunity for students to weigh material goods against
nonmaterial quality of life issues. Referencing Gregg Easterbrook’s book The
Progress Paradox (New York: Random House, 2003), the question leads students
through an explication of various pieces of economic data suggesting that the stan-
dard of living has increased dramatically in the United States. Yet, the question asks,
why might people feel that life was better in an earlier time? Students will likely sur-
face a number of issues, including environmental concerns. For more discussion
visit the Web site of the New Economics Foundation to consider their “Happy
Planet Index” (on the web at http://www.happyplanetindex.org/introduction.htm).
Questions 4 and 7 reference winners of the Nobel Prize in Economics. For more
information on Nobel laureates in Economics visit the eMuseum at
http://nobelprize.org/nobel_prizes/economics/.
Question 8 references a 2005 story from The Wall Street Journal reporting a “clear
explosion in economics as a major.” (Jessica E. Vascellaro, “The Hot Major for
Undergrads Is Economics,” The Wall Street Journal, July 5, 2005, p. A11). This ques-
tion asks students to consider why this might be the case. Students should be
encouraged to apply the key ideas of economics discussed in the chapter to the
choice of undergraduate major.
In the online version of the story the title includes the important point that econom-
ics is the hot major for students seeking higher pay. (The story is available at
http://encarta.msn.com/encnet/Departments/elearning/?article=hotmajor.)
Economics Is Everywhere
The following short synopsis, selected from the many vignettes in Economics is
Everywhere by Daniel S. Hamermesh (packaged for free with any Worth Principles
text), corresponds to the material covered in this chapter of the text. The question
that accompanies each vignette appears as an essay-type question in the
Hamermesh text; for use with the Stone text, those questions are adapted to a
multiple-choice format and are also assignable in EconPortal. The correct answers
are indicated and feedback is provided here.
1.15 At a party on a university’s campus, “free” Ben & Jerry’s ice cream was being
distributed. However, as one might expect, there was a line to get it. The point of
the vignette is to make students aware that the use of time is a cost (opportunity
cost) and that the cost will differ for different people.
Q: The line to get “free” Ben & Jerry’s ice cream has about 20 people already on it
and seems to be moving slowly. Which of the following statements is correct?
a. Since the ice cream is free there is no cost attached to obtaining ice cream.
b. Professors and students are equally likely to wait on line to get ice cream.
c. Professors would be less likely than students to wait on line to get ice
cream.
Chapter Overview
The chapter begins with material about economics in general, almost immediately
introducing the student to the tradeoff between efficiency and equity. Ten key ideas
of economics are then introduced and discussed.
Chapter Outline
What Is Economics About?
Microeconomics versus Macroeconomics
Economic Theories and Reality
Model Building
Ceteris Paribus: All Else Held Constant
Efficiency versus Equity
Checkpoint: What Is Economics About?
Key Ideas of Economics
Choice and Scarcity Force Tradeoffs
Opportunity Costs Dominate Our Lives
Issue: Do Hummingbirds Make Good Economists?
Rational Behavior Requires Thinking at the Margin
People Follow Incentives
Markets Are Efficient
Government Must Deal with Market Failure
Information Is Important
Specialization and Trade Improve Our Lives
Productivity Determines Our Standard of Living
Government Can Smooth the Fluctuations in the Overall Economy
Checkpoint: Key Ideas of Economics
Appendix: Working With Graphs and Formulas
1
,2 Chapter 1 / Exploring Economics
Ideas for Capturing Your Classroom Audience
■ Talk about choices. Using either small groups or the class as a whole, develop a
list of choices students have made, including their choice to take your class! Keep
the list available for reference when you discuss the key ideas of economics
detailed in this chapter. Discuss similarities and differences to illustrate how eco-
nomics can account for the individual and the collection of individual choices.
You may also want to consider a follow-up assignment in which students are
asked to relate the key ideas to the choices they make every day, with particular
emphasis on developing a consciousness of opportunity cost and thinking at the
margin.
■ Bring the global economy into your classroom. Ask students where many of the
goods they use were made. The example of iPods can be used to illustrate a busi-
ness decision about where to produce a product (in this case, China) based on
cost. This also allows for a discussion of globalization, outsourcing, and issues
of worker exploitation. Have students use a search engine such as Google and
use the key words “iPods where made.” A number of sources will pop up, includ-
ing the article at http://www.scribd.com/doc/969788/Why-iPods-Are-Made-in-
China that clearly explains the cost advantages and trade aspects. Other articles
of interest include those that explore what a “fair trade” iPod would cost.
Chapter Checkpoints
What Is Economics About?
Question: In each situation below, determine whether it is a microeconomic or
macroeconomic issue.
1. Hewlett-Packard announces that it is lowering the price of printers by 15%.
2. The president proposes a tax cut.
3. You decide to look for a new job.
4. The economy is in a recession and the job market is bad.
5. The Federal Reserve announces that it is raising interest rates because it
fears inflation.
6. You get a nice raise.
7. Average wages grew by 2% last year.
Suggested Answers:
MICRO issues (1, 3, 6); MACRO issues (2, 4, 5, 7)
The point is to check that students can: determine whether the issue deals with an
individual, firm, or industry (and how they make decisions) and thus is a MICRO
issue or whether it focuses on broader economic issues such as inflation, employ-
ment and unemployment, and economic growth, and thus is a MACRO issue. Be
alert to the fact that students may catch on to the pattern (i.e., micro issues have
odd numbers and macro issues have even numbers) and so have the correct answer
without understanding the economics!
For the MICRO issues (1, 3, 6): Emphasize the “you” (meaning the individual) in
issues 3 and 7, and the individual company noted in issue 1.
, Chapter 1 / Exploring Economics 3
For the MACRO issues (2, 5, and 7): Students may identify the terms “recession” and
“inflation” in issues 4 and 5, but the macro aspects of a “tax cut” and “average
wages” in issues 2 and 7 may not be as obvious.
The “couplets” of answers 3 and 4 and 6 and 7 provide good opportunities to point
up the relationship and differences between macro and micro.
Key Ideas of Economics
Question: McDonald’s has recently introduced a premium blend of coffee that sells
for more than its standard coffee. Does this represent thinking at the margin?
Suggested Answer: Yes it does. McDonald’s is adding one more product (premium
coffee) to its product line. Thinking at the margin entails thinking about how you
can improve an operation (or increase profits) by adding to your existing product
line, reducing costs, or many other outcomes.
The point is to check that students can apply the idea of thinking at the margin to
a real-world business decision. Students will likely identify that this is an attempt by
McDonald’s to compete with Starbucks and Dunkin’ Donuts (and any other coffee
sellers in the area of their stores). The emphasis here is that firms use marginal con-
cepts in making decisions: what is the marginal revenue from one more product or
even one more cup of coffee sold? What is the marginal cost? Students may identify
that once the equipment is installed the additional costs of brewing more cups
depends only on the ingredients used.
Debate the Issues
Issue: Do Hummingbirds Make Good Economists?
Black-chinned hummingbirds in the Sonoran desert of Arizona demonstrate behav-
ior that makes perfect sense to an economist: they exert more effort into protecting
a rich source of food than they do for a less favorable source.
A number of studies have explored whether animals engage in what economists call
rational behavior. See, for example, the study on rats by Aaron P. Blaisdell
(“Rational Behavior in Rats,” (January 2010, on the web site of the American
Psychological Association, accessed 04/02/2010 at http://www.apa.org/science/
about/psa/2010/01/sci-brief.aspx).
You can use this study as the basis for a discussion about the idea of rational choice
and to debate whether “rational” behavior is possible only for humans. Explore how
economics intersects with other social sciences.
Here’s another interesting topic: Jennifer Brown (an applied macroeconomist at the
Kellogg School of Management, Northwestern University) has studied the impact of
the participation of golf superstars on other top players in tournaments. Her findings
suggest that non-superstars, knowing they are not likely to win because of the partici-
pation of superstars, don’t seem to perform as well as they have in tournaments in
which superstars have not played. See the story about Brown’s work by Jonah Lehrer
(Wall Street Journal, April 3, 2010, p. W1), which is available on the Web at:
http://online.wsj.com/article/SB10001424052702303960604575158122511930684
.html
, 4 Chapter 1 / Exploring Economics
For the PDF of the Brown article, visit http://are.berkeley.edu/~brown/Brown%
20-%20Competing%20with%20 Superstars.pdf
Examples Used in the End-of-Chapter Questions
Question 3 presents an opportunity for students to weigh material goods against
nonmaterial quality of life issues. Referencing Gregg Easterbrook’s book The
Progress Paradox (New York: Random House, 2003), the question leads students
through an explication of various pieces of economic data suggesting that the stan-
dard of living has increased dramatically in the United States. Yet, the question asks,
why might people feel that life was better in an earlier time? Students will likely sur-
face a number of issues, including environmental concerns. For more discussion
visit the Web site of the New Economics Foundation to consider their “Happy
Planet Index” (on the web at http://www.happyplanetindex.org/introduction.htm).
Questions 4 and 7 reference winners of the Nobel Prize in Economics. For more
information on Nobel laureates in Economics visit the eMuseum at
http://nobelprize.org/nobel_prizes/economics/.
Question 8 references a 2005 story from The Wall Street Journal reporting a “clear
explosion in economics as a major.” (Jessica E. Vascellaro, “The Hot Major for
Undergrads Is Economics,” The Wall Street Journal, July 5, 2005, p. A11). This ques-
tion asks students to consider why this might be the case. Students should be
encouraged to apply the key ideas of economics discussed in the chapter to the
choice of undergraduate major.
In the online version of the story the title includes the important point that econom-
ics is the hot major for students seeking higher pay. (The story is available at
http://encarta.msn.com/encnet/Departments/elearning/?article=hotmajor.)
Economics Is Everywhere
The following short synopsis, selected from the many vignettes in Economics is
Everywhere by Daniel S. Hamermesh (packaged for free with any Worth Principles
text), corresponds to the material covered in this chapter of the text. The question
that accompanies each vignette appears as an essay-type question in the
Hamermesh text; for use with the Stone text, those questions are adapted to a
multiple-choice format and are also assignable in EconPortal. The correct answers
are indicated and feedback is provided here.
1.15 At a party on a university’s campus, “free” Ben & Jerry’s ice cream was being
distributed. However, as one might expect, there was a line to get it. The point of
the vignette is to make students aware that the use of time is a cost (opportunity
cost) and that the cost will differ for different people.
Q: The line to get “free” Ben & Jerry’s ice cream has about 20 people already on it
and seems to be moving slowly. Which of the following statements is correct?
a. Since the ice cream is free there is no cost attached to obtaining ice cream.
b. Professors and students are equally likely to wait on line to get ice cream.
c. Professors would be less likely than students to wait on line to get ice
cream.
