Solution Manual for Principles of Microeconomics CANADIAN EDITION 5th Edition Mankiw

2 THINKING LIKE AN ECONOMIST WHAT’S NEW IN THE FIFTH EDITION? A new In The News box, “Environmental Economists” replaces the old “Why Should You Study Economics” box. LEARNING OBJECTIVES By the end of this chapter, students should understand:  how economists apply the methods of science.  how assumptions and models can shed light on the world.  two simple models—the circular flow and the production possibilities frontier.  the difference between microeconomics and macroeconomics.  the difference between positive and normative statements.  the role of economists in making policy.  why economists sometimes disagree with one another. WHY IS THIS CHAPTER IMPORTANT TO STUDENTS? Chapter 2 is the second chapter in a three chapter section that serves as the introduction of the text. Chapter 1 introduced ten principles of economics that will be revisited throughout the text. Chapter 2 develops how economists approach problems while Chapter 3 will explain how individuals and countries gain from trade. The purpose of Chapter 2 is to familiarize students with how economists approach economic problems. With practice, they will learn how to approach similar problems in this dispassionate systematic way. They will see how economists employ the scientific method, the role of assumptions in model building, and the application of two specific economic models. Students will also learn the important distinction between two roles economists can play: as scientists when we try to explain the economic world and as policymakers when we try to improve it. IF NOTHING ELSE, MY STUDENTS SHOULD LEARN… 1. Economists try to address their subject with a scientist’s objectivity. Like all scientists, they make appropriate assumptions and build simplified models in order to understand the world around them. Two simple economic models are the circular-flow diagram and the production possibilities frontier. 2. The field of economics is divided into two subfields: microeconomics and macroeconomics. Microeconomists study decisionmaking by households and firms and the interaction among households and firms in the marketplace. Macroeconomists study the forces and trends that affect the economy as a whole. 3. A positive statement is an assertion about how the world is. A normative statement is an assertion about how the world ought to be. When economists make normative statements, they are acting more as policy advisers than scientists. 4. Economists who advise policymakers offer conflicting advice either because of differences in scientific judgments or because of differences in values. At other times, economists are united in the advice they offer, but policymakers may choose to ignore it. WHAT CAN I DO IN CLASS? I. The Economist as Scientist A. The Scientific Method: Observation, Theory, and More Observation 1. Observations help us to develop theory. 2. Data can be collected and analyzed to evaluate theories. 3. Using data to evaluate theories is more difficult in economics than in physical science because economists are unable to generate their own data and must make do with whatever data are available. 4. Thus, economists pay close attention to the natural experiments offered by history. B. The Role of Assumptions 1. Assumptions can simplify the complex world and make it easier to understand. 2. Example: to understand international trade, it may be helpful to start out assuming that there are only two countries in the world producing only two goods. Once we understand how trade would work between these two countries, we can extend our analysis to a greater number of countries and goods. 3. One important role of a scientist is to understand which assumptions one should make. 4. Economists use different assumptions to answer different questions. C. Economic Models 1. Economists use economic models to explain the world around us. To illustrate to the class how simple but unrealistic models can be useful, bring a road map to class. Point out how unrealistic it is. For example, it does not show where all of the stop signs, gas stations, or restaurants are located. It assumes that the earth is flat and two-dimensional. But, despite these simplifications, a map usually helps travelers get from one 2. Most economic models are composed of diagrams and equations. place to another. Thus, it is a good model. 3. The goal of a model is to simplify reality in order to increase our understanding. This is where the use of assumptions is helpful. Activity 1 — Realism and Models: An Analogy Type: In-class demonstration Topics: Models Materials needed: Airplane kit, sheet of paper, whirl-a-gig wing toy (Note: the whirl-a-gig wing toy is a helicopter wing on a stick; it is often sold in museum gift shops as well as toy stores.) Time: 5 minutes Class limitations: Works in any class size Ask the class if a realistic model is better than an unrealistic model. Show them the airplane model kit. Describe some of the details included in model (rivets, canopy, struts, etc.). Shake the box to rattle the large number of parts. This is a fairly realistic model, although obviously not a real airplane. Its complexity adds realism, but at a cost; assembling the model is very time consuming. Drop the box on the floor. Tell the class, “This model, even when completed, cannot fly.” Take a sheet of paper and fold it into a paper airplane. Show the class this new model. Its virtues include simplicity and ease of assembly, but it is less realistic than the airplane model kit. Throw the airplane and explain, “While less detailed, this model can glide through the air.” Show the students the whirl-a-gig wing toy. This model looks nothing like an airplane – just a T-shaped piece of wood. Yet, this model does something that the other two models cannot do: it actually generates lift. This toy demonstrates the same aerodynamic principles as a real airplane wing. Twirl the stick between your