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Economics manual chap

Ask about the differences (and similarities) between microeconomics and macroeconomics and the difference between positive and normative analysis. Review the concept of a market and the role prices play in allocating resources. Discussions of economic theories and models may be a bit abstract at this point in the course, but you can lay the groundwork for a deeper discussion that might take place when you cover consumer behavior in Chapter 3. Section 1. 3 considers real and nominal prices.

Given the reliance on dollar prices in the economy, students must understand the difference between real and nominal rises and how to compute real prices. Most students know about the Consumer Price Index, so you might also mention other price indexes such as the Producer Price Index and the Personal Consumption Expenditures (PACE) Price Index, which is the Feud’s preferred inflation measure. L It is very useful to go over some numerical examples using goods that are in the news and/or that students often purchase such as gasoline, food, textbooks, and a college education. In general, the first class is a good time to pique student interest in the course. It is also a good time to tell students that they need

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to work hard to learn how to do economic analysis, and that memorization alone will not get them through the course. Students must learn to think like economists, so encourage them to work lots of problems. Also encourage them to draw graphs neatly and large enough to make them easy to interpret. It always amazes me to see the tiny, poorly drawn graphs some students produce. It is no wonder their answers are often incorrect.

You might even suggest they bring a small ruler and colored pencils to class so they can draw good diagrams. QUESTIONS FOR REVIEW 1 . It is often said that a good theory is one that can be refuted by an empirical, deteriorated study. Explain why a theory that cannot be evaluated empirically is not a good theory. Economics manual chap 1 7 De pinky By habitual was intended to explain. If a theory cannot be evaluated or tested by comparing its predictions to known facts and data, then we have no idea whether the theory is valid.

If we cannot validate the theory, we cannot have any confidence in its predictions, and it is of little use. The ICP and PIP are reported by the Bureau of Labor Statistics (www. Bills. Gob). The PACE Price Index is compiled by the Bureau of Economic Analysis in the Commerce Department (www. EAI. Gob). 2 The College Board collects data on college tuition (www. Collaborate. Com). Copyright 2009 Pearson Education, Inc. Publishing as Prentice Hall. 2. Which of the following two statements involves positive economic analysis and which normative?

How do the two kinds of analysis differ? A. Gasoline rationing (allocating to each individual a maximum amount of gasoline that can be purchased each year) is a poor social policy because it interferes with the workings of the competitive market system. Positive economic analysis is concerned with explaining what is and predicting what ill be. Normative economic analysis describes what ought to be. Statement (a) is primarily normative because it makes the normative assertion (I. E. , a value Judgment) that gasoline rationing is “poor social policy. There is also a positive element to statement (a), because it claims that gasoline rationing “interferes with the workings of the competitive market system. ” This is a prediction that a constraint placed on demand will change the market equilibrium. B. Gasoline rationing is a policy under which more people are made worse off than are made better off. Statement (b) is positive because it predicts how gasoline rationing effects people without making a value Judgment about the desirability of the rationing policy. 3. Suppose the price of regular-octane gasoline were 20 cents per gallon higher in New Jersey than in Oklahoma.

Do you think there would be an opportunity for arbitrage (I. E. , that firms could buy gas in Oklahoma and then sell it at a profit in New Jersey)? Why or why not? Oklahoma and New Jersey represent separate geographic markets for gasoline because of high transportation costs. There would be an opportunity for arbitrage if remonstration costs were less than 20 cents per gallon. Then arbitrageurs could make a profit by purchasing gasoline in Oklahoma, paying to transport it to New Jersey and then selling it in New Jersey. If the transportation costs were 20 cents or higher, however, no arbitrage would take place. . In Example 1. 3, what economic forces explain why the real price of eggs has fallen while the real price of a college education has increased? How have these changes The price and quantity of goods (e. G. , eggs) and services (e. G. , a college education) are determined by the interaction of supply and demand. The real price of eggs fell from 1970 to 2007 because of either a reduction in demand (e. G. , consumers switched to lower-cholesterol food), a reduction in production costs (e. G. , improvements in egg production technology), or both.

In response, the price of eggs relative to other foods decreased. The real price of a college education rose because of either an increase in demand (e. G. , the perceived value of a college education increased, population increased, etc. ), an increase in the cost of education (e. G. , increase in faculty and staff salaries), or both. 5. Suppose that the Japanese yen rises against the U. S. Dollar – that is, it will take more dollars to buy any given amount of Japanese yen. Explain why this increase simultaneously increases the real price of Japanese cars for U. S. Nonusers and lowers the real price of U. S. Automobiles for Japanese consumers. As the value of the yen grows relative to the dollar, it takes more dollars to purchase a yen, and it takes fewer yen to purchase a dollar. Assume that the costs of production for both Japanese and U. S. Automobiles remain unchanged. Then using the new exchange rate, the purchase of a Japanese automobile priced in yen requires ore dollars, so the real price of Japanese cars in dollars increases. Similarly, the purchase of a U. S. Automobile priced in dollars requires fewer yen, and thus the real price off U.

S automobile in yen decreases. 2 6. The price of long-distance telephone service fell from 40 cents per minute in 1996 to 22 cents per minute in 1999, a 45-percent (18 cents/40 cents) decrease. The Consumer Price Index increased by 10 percent over this period. What happened to the real price of telephone service? Let the ICP for 1996 equal 100 and the ICP for 1999 equal 1 10, which reflects a 10% increase in the overall price level. Now let’s find the real price of telephone service (in 1996 dollars) in each year. The real price in 1996 is 40 cents.

To find the real price in 1999, divide CP11996 by CP11999 and multiply the result by the nominal price in 1999. The result is (100/110)(22) = 20 cents. The real price therefore fell from 40 to 20 cents, a 50% decline. EXERCISES 1 . Decide whether each of the following statements is true or false and explain why: a. Fast-food chains like McDonald’s, Burger King, and Wendy operate all over the United States. Therefore the market for fast food is a national market. This statement s false. People generally buy fast food locally and do not travel large distances across the United States Just to buy a cheaper fast food meal.

Because there is little potential for arbitrage between fast food restaurants that are located some distance b. People generally buy clothing in the city in which they live. Therefore there is a clothing market in, say, Atlanta that is distinct from the clothing market in Los Angels. This statement is false. Although consumers are unlikely to travel across the country to buy clothing, they can purchase many items online. In this way, clothing retailers n different cities compete with each other and with online stores such as L. L. Bean.

Also, suppliers can easily move clothing from one part of the country to another. Thus, if clothing is more expensive in Atlanta than Los Angels, clothing companies can shift supplies to Atlanta, which would reduce the price in Atlanta. Occasionally, there may be a market for a specific clothing item in a faraway market that results in a great opportunity for arbitrage, such as the market for blue Jeans in the old Soviet Union. C. Some consumers strongly prefer Pepsi and some strongly prefer Coke. Therefore there is no single market for colas. This statement is false.

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