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MODULE 1: THE STUDY OF ECONOMICS

The purpose of this module is to introduce the students to the economic way of thinking, to introduce some important terminology, and to engage the students in the subject matter.

Student learning objectives:

• 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

Key Economic Concepts For This Module:

• Economic resources are limited/scarce which implies that the goods/services they produce are limited.

• Scarcity requires that choices be made.

• Choices imply that things are given up.

• There is an opportunity cost for all choices.

Common Student Difficulties:

• Students often assume that the first chapter in a textbook can easily be skimmed and dismissed as “easy stuff.” It’s important to stress to the students that, although there will be more difficult chapters, a solid understanding of the terminology and decision-making from this chapter will prevent headaches and missteps later.

• Economic resources are very different from the “resources” that are often described in everyday speech. For example, there is a difference between money (financial capital) and capital (as we use the term in economics). We might hear that a firm’s “capital” is depleted during a recession. This typically means that the firm is having a cash flow problem, not that they are losing their machinery.

• At the individual level, we typically think of how our scarce income prevents us from consuming some of the goods we most desire. Get the students to think more about why our income is scarce. It is probably because our time and our labor resources, both in terms of quality and quantity, are limited in what they can command in the job market.

• The opportunity cost of choosing an activity is not equal to all of the forgone opportunities; it is the cost of the one with the highest value. For example, suppose a student chooses to study economics for one hour after school. In that hour, he could have worked at the grocery store for $10 per hour, or mowed his grandmother’s yard for $20. The opportunity cost of studying is $20, not $30, because he could not have both worked at the grocery store and mowed the yard.

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• An important characteristic about normative economic statements is that they include implicit or explicit value judgments. If Tina states that “we must spend more money on our schools, and less on the military” she is implicitly telling you that she places a higher value on education than she does on national defense. Positive economic statements are absent of value judgments.

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In-Class Presentation of Module and Sample Lecture

Suggested time: This module can be covered in one hour-long lecture with another hour devoted to in-class discussion and/or activities.

I. Individual Choice

A. Resources are Scarce

B. Opportunity Cost

AI. Microeconomics vs. Macroeconomics

BI. Positive versus Normative Economics

A. When and Why Economists Disagree

I. Individual Choice

Begin with a formal definition of economics, followed by a more concise version that focuses on scarcity and choice. These definitions transition into a brief discussion of resources, how they are scarce, and how decisions involve opportunity costs.

Economics: The social science concerned with the efficient use of limited or scarce resources to achieve maximum satisfaction of human economic wants.

Economics is the study of scarcity and choice. Every economic issue involves, at its most basic level, individual choice—decisions by individuals about what to do and what not to do. In fact, you might say that it isn’t economics if it isn’t about choice.

A. Resources are Scarce

What exactly are these resources?

Resources: labor, land (or natural resources), capital, and entrepreneurial ability (also described as human capital).

• labor (the effort of workers),

• land (including timber, water, minerals, and all other resources that come from nature),

• capital (machinery, buildings, tools, and all other manufactured goods used to make other goods and services)

• entrepreneurship (risk taking, innovation, and the organization of resources for production).

The instructor can also discuss the difference between wants and needs.

Ask the students to generate a quick list of each.

• Wants: limitless and varied. Ex. golf clubs, a college degree, TiVo.

• Needs (a subset of wants): clean air, clean water, food, clothing, and shelter.

Economic resources are limited/scarce which implies that the goods/services they produce must be limited.

Scarcity requires that choices be made. Choices imply that things are given up.

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Provide an example that relates to the school or local community.

Example The size of the school parking lot is limited, which means only a certain number of cars can be parked there. If the parking lot were to be expanded, without purchasing more land, what would be sacrificed?

Provide an example at the national level.

Example A hydroelectric dam is being planned for a river. Many costly resources will be required to build this dam. Those resources could have been used in other projects. So a bridge over a scenic wild river, or a new highway was sacrificed. By damming the river, we also give up goods and services that could have been generated by the undammed river. Maybe guided whitewater rafting was sacrificed.

These sacrifices are called opportunity costs. To get more of one thing, you forgo the opportunity of getting something else.

So the cost of the dam is the value of all that which is sacrificed to obtain it.

What about “free” stuff?

If you’ve ever bought paint at a store like Sherwin Williams, they will give you some wooden stir-sticks and a metal can opener.

Is this free? No.

Resources were used to make these items (wood, aluminum and labor) and because those resources have alternative uses, society gave up something else to produce these items that you receive at (seemingly) no cost.

B. Opportunity Cost

Opportunity Cost: The real cost of something is what you must give up to get it

As the above examples illustrate, decisions made in the face of scarce resources involve bypassing other opportunities and these forgone opportunities have value, or cost.

Economists are keenly aware of these opportunity costs.

Example Suppose you purchase a digital camera that costs $100, and you decided not to buy a pair of running shoes that also cost $100. The opportunity cost of buying the camera is $100, plus the forgone enjoyment of the running shoes.

Example Ask the students for an example of an after-school activity they might choose (a sport, club, theatre, etc). By choosing to play tennis (for example), what was the next best activity given up? Suppose it was a spot in the band.

The student is giving up the spot in the band, an activity that would have given the student a lot of enjoyment. How could we place a value on this forgone fun?

If you had to pay a fee for the spot in the band, how much would you pay? Start at $5. If you would pay $5 to join the band and have that fun, would you pay $10, $20, $50? Once a student reaches the maximum dollar amount that they would pay to join the band, you have placed a value on the opportunity cost of playing tennis.

AI. Microeconomics and Macroeconomics

Start with the definitions, and then possibly have a recent newspaper article that illustrates a micro topic and one that has a macro topic. This could also be a homework assignment for each student to bring articles and explain why they are micro or macro, or maybe both.

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Microeconomics: The branch of economics concerned with how individuals make decisions and how these decisions interact. Microeconomics focuses on choices made by individuals, households, or firms—the smaller parts that make up the economy as a whole.

Macroeconomics: The branch of economics that studies the overall ups and downs of the economy. Macro focuses on economic aggregates—economic measures such as the unemployment rate, the inflation rate, and gross domestic product—that summarize data across many different markets. Macroeconomics focuses on the bigger picture.

BI. Positive and Normative Economics

Again, begin with the definitions and have several examples prepared. Then ask the students to generate their own examples, perhaps using policies that affect them at the school.

Positive economic: Economic analysis used to answer questions about the way the world works. Statements of “what is” or “what will be.” No value judgments are applied.

Normative economics: economic analysis that involves saying how the world should work. Statements of “what should be.” These involve value judgments of what is “right,” “wrong,” or “best.”

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In-Class Activities and Demonstrations

If you have assigned the students to find micro/macro news articles, take a few minutes to have two or three students share the article, give a short synopsis and justify why it is micro or macro.

This could also be a time where students share articles that have positive/normative economic content. You might suggest students look at Paul Krugman’s blog (), a rich source of both forms of analysis.

The rest of this class time should be spent doing the following activity.

Build a zoo!

Break students into groups of 3-5 and have them build a zoo. Each group has 20 acres to use, and each exhibit takes up a certain number of acres (see Handout on the following page). After the zoo is constructed, have students share their choices. Ask about the choices each group made. Why did they not choose every type of exhibit (scarcity)? Why did they not just have a zoo full of predators or primates (diminishing marginal utility)? Why did they choose one exhibit over another (cost vs. benefit)? What was the last exhibit to make the cut (marginal analysis)?1

1 If the students have not already had microeconomics, you can quickly explain the concepts of diminishing marginal utility and weighing the marginal benefit against the marginal cost.

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HANDOUT

Date_____ Group members ____________________

Each exhibit requires the following units of land (20 acres included in total). Choose from the following and fill in the grid provided.

|Elephants – 3 acres |Howler monkeys – ½ acre |

|Lions – 1 acre |Grizzly bears - 1 ½ acres |

|Polar bears –1 ½ acres |Reptile house – 1 acre |

|Tigers – 1 acre |Orangutans – 1 acre |

|Giraffes – 2 acre |Hippos - ½ acre |

|Ostriches – ½ acre |Playground – ¼ acre |

|Zebras – 1 acre |Gorillas – 2 acres |

|Llamas – 1 acre |White rhinos – 1 acre |

|Kangaroos – ½ acre |Lake with waterfowl and flamingos – 3 acres |

|Petting zoo – ½ acre |Picnic area – 1 acre |

|Gift shop – ¼ acre |Wolves – 2 acres |

|Jaguar – ½ acre |Restaurant– ½ acre |

|Insect exhibit – ¼ acre |Climbing wall – ½ acre |

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(Each square = ½ acre)

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