Instructor Manual Table of contents Part 1 Introduction Chapte r 1 Ten principles of economics Chapt er 2 Thinking like an economist Chapter 3 Interdependence and the gains from trade Part 2 Supply and demand I: How markets work Chapter 4 The market forces of supply and demand Chapter 5 Elasticity and its application Chapter 6 Supply, demand and government policies Part 3 Supply and demand II: Markets and welfare Chapter 7 Consumers, producers and the efficiency of markets Chapter 8 App lication: The costs of taxation Chapter 9 A pplication: International trade Part 4 The economics of the public sector Chapter 10 Extern alities Chapter 11 Pu blic goods and common resources Chapter 12 The design of the tax system Part 5 Firm behaviour and the organisation of industry Chapter 13 The costs of production Chapter 14 Firms in competitive markets Chapter 15 Monopoly Chap ter 16 Monopolistic competition Chapter 17 Oligopoly and business strategy Part 6 The economics of labour markets Chapter 18 The markets for the factors of product ion Chapter 19 Earnings and discrimination Chapter 2 0 Income inequality and poverty Part 7 Topics for further study Chapter 2 1 The theory of consumer choice Chapter 22 Frontiers of microeconomics Principles of Microeconomics – 8th edition 0101 Copyright 2021 Cengage Learning Australia Pty Limited Chapter 1 Ten principles of economics Learning objectives After reading this chapter, students should be able to : recognise that people face trade -offs when they make decisions, and discuss how the nature of these
trade -offs influences their behaviour
explain why trade among people or nations can be good for everyone, and discuss why markets are a
good, but not perfect, way to allocate resources
identify the factors that drive some significant trends in the overall economy.
Key points The fundamental lessons about individual decision making are that people face trade -offs among
alternative goals, that the cost of any action is measured in terms of forgone opportunities, that
rational people make decisions by comparing marginal costs and marginal benefits , and that people
change their behaviour in response to the incentives they face.
The fundamental lessons about interactions among people are that trade can be mutually beneficial ,
that markets are usually a good way of coordinating tra de among people and that the government can
potentially improve market outcomes if there is some market failure or if the market outcome is
inequitable.
The fundamental lessons about the economy as a whole are that productivity is the ultimate source of
living standards, that money growth is the ultimate source of inflation and that society faces a short -
term trade -off between inflation and unemployment.
Chapter outline Introduction Begin by pointing out that economics is a subject that students must conf ront in their everyday lives. Point out that they already spend a great deal of their time thinking about economic issues: prices, buying decisions, use of their time, etc. The word ‘economy’ comes from the Greek word meaning ‘one who manages a household ’. This
makes some sense, since in the economy we are faced with many decisions (just as a household is).
The f undamental economic problem: resources are scarce.
You will want to start the semester by explaining to students that economics is by and large a subject of logic ; however, part of learning economics is understanding a new vocabulary. In order to have a productive discourse, e conomists generally use very precise (and sometimes different) definitions for words that are commonly used outside of the economics discipline. The use of such precise language is common to other disciplines. Therefore, it will be helpful to students if you follow the definitions provided in the text as much as possible. Definition: scarcity – the limited nature of society ’s resources .
Definition: economics – the study of how society manages its scarce resources. Principles of Microeconomics – 8th edition 0102 Copyright 2021 Cengage Learning Australia Pty Limited Do not underestimate how challenging these principles will be for the student because most first -year university students have limited experience with viewing the world from a cause -and-effect perspective . This is a good time to emphasise that there are known reasons for why many things work the way they do in the real world. Altho ugh we cannot predict the behaviour of any one individual, centuries of observation and analysis have uncovered several general rules explaining the decisions and behaviours of large numbers of individuals. How people make decisions Principle 1: People face trade -offs ‘There is no such thing as a free lunch.’ Making decisions requires trading off one goal for another.
Examples include how a student spends their time, how a family decides to spend its income, how
the Australian government spends tax dollars and how regulations may protect the environment at a
cost to firm owners.
A special example of a trade -off is the trade -off between efficiency and equity.
– Definition: efficiency – the property of society getting the most it can from its sca rce resources.
Example: Wasting no resources when making a pie, so the pie becomes as large as possible.
– Definition: equity – the property of distributing economic prosperity fairly among the members
of society.
Example: How should the pie be distributed, i.e. who will get a larger slice of the pie and who
will get a smaller slice, or will slices be distributed equally ?
– While it is useful to strictly distinguish between efficiency and equity for analytical purposes ,
these two concepts are als o linked. For example, tax dollars paid by wealthy Australians and
then distributed to those less fortunate may improve equity but also may lower the incentive to
work hard and therefore reduce the level of output produced by our resources.
– This implies that the cost of increased equity is a reduction in the efficient use of resources.
Principle 2: The cost of something is what you give up to get it Making decisions requires individuals to consider the benefits and costs of alternative actions .
Example: What are the costs of going to university?
– We cannot count the complete cost of room and board because the student would have to pay
for food and shelter even if they were not in school. These are part of the cost of li ving and not
part of the cost of studying.
– We would want to count the value of the student’s time since she could be working for pay
instead of attending classes and studying. Also on a very nice sunny day some students might
value the cost of attending classes m uch higher than on a rainy day.
Definition: opportunity cost – whatever must be given up to obtain some item.
One of the hardest ideas for students to grasp is that ‘free’ things are not truly free. So you will need to provide students with numerous examples of ‘free’ t hings with hidden costs, especially considering the value of time. The relevant opportunity cost is the next best alternative, which mi ght differ for each individual. Principle 3: Rational people think at the margin Many decisions in life are incremental in nature : Should I remain in school this semester? Should I
take another course this semester?
Definition: marginal change – a small incremental adjustment to a plan of action.
Example: You are trying to decide on how many years to stay in sch ool. Comparing the lifestyle of
an individual with a PhD to one of an individual who has dropped out of secondary school would be
inappropriate , because the choice is not really to drop out versus a PhD . Instead the decision is
whether or not to remain in school for an additional year. Thus, you need to compare the additional
benefits of another year in school (the marginal benefit) with the additional cost of staying in school
for another year (the marginal cost).
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