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SOLUTION MANUAL FOR MACROECONOMICS PRINCIPLES, APPLICATIONS AND TOOLS 10TH EDITION BY ARTHUR O'SULLIVAN, STEVEN M SHEFFRIN, STEPHEN J PEREZ€17,96
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Chapter 18 International Trade and Public Policy 197
Chapter 19 The World of International Finance 211
, 1
Introduction:
What Is Economics?
Chapter Summary
Chapter 1 provides a basic illustration of what economics is and why it is useful. Economics is
the study of the choices people, firms, and governments make when resources are scarce.
Economic analysis helps us understand the consequences of these choices. Here are the main
points of the chapter:
Most of modern economics is based on positive analysis, which answers the question
―What is?‖ or ―What will be?‖
Economies must answer three questions: What products do we produce? How do we
produce the products? Who consumes the products?
Normative analysis answers the question ―What ought to be?‖
To think like an economist, we (a) use assumptions, (b) use the notion of ceteris paribus,
(c) think in marginal terms, and (d) assume that rational people respond to incentives.
Macroeconomics helps us understand why economies grow and understand economic
fluctuations. Microeconomics helps us understand how markets work.
Learning Objectives:
1.1 What is Economics? List the three key economic questions.
1.2 Economic Analysis and Modern Problems: Discuss the insights from economics for a real-
world problem such as congestion.
1.3 The Economic Way of Thinking: List the four elements of the economic way of thinking.
1.4 Employability—Economic Logic on the Job: Explain how studying economics improves a
person‘s employment prospects.
1.5 Preview of Coming Attractions—Macroeconomics: List three ways to use
macroeconomics.
1.6 Preview of Coming Attractions—Microeconomics: List three ways to use
microeconomics.
Approaching the Material
The first classes are very important in determining your students‘ attitudes toward economics.
You have to find out their attitude and use real-world examples that help them understand that
economics relates to their lives. Stating to the class that economics is ―The study of how scarce
resources are allocated to satisfy unlimited wants‖ is accurate but is also one of the reasons why
some people still refer to economics as ―the dismal science.‖ Try the following definition of
economics instead: ―Economics is the study of how you, your friends, the stores where you shop,
and your mayor make choices.‖ Every student in front of you makes choices everyday—what to
wear, what to have for breakfast, or whether to sleep in, whether to study or play video games.
Students allocate resources all day long. Time is one resource that everyone can relate to and
, everyone has the same amount of. Use what students know to teach them what you want them to
know.
Chapter Outline
1.1 What Is Economics?
A. Scarcity: the resources we use to produce goods and
services are limited. Economics is the study of choices
when there is scarcity.
Teaching Tip
Students have scarce resources they have to allocate. Ask the class who had
breakfast this morning. You should have a room full of both breakfasters and those
who did not eat. Ask those who did not eat breakfast why not. Someone is sure to
say they did not have the time. Explain that we all have the same amount of time (a
scarce resource), but we choose to allocate it differently. (i.e., sleep in, workout,
study, eat breakfast).
B. Factors of Production
Factors of production: the resources used to produce goods
and services, also known as production inputs.
Natural resources: the resources provided by nature and
used to produce goods and services.
Labor: the physical and mental effort people use to produce
goods and services.
Physical capital: the stock of equipment, machines,
structures, and infrastructure that is used to produce
goods and services.
Human capital: the knowledge and skills acquired by a
worker through education and experience.
Entrepreneurship: the effort used to coordinate the factors
of production—natural resources, labor, physical capital,
and human capital—to produce and sell products.
C. Positive versus Normative Analysis
1. Positive analysis answers the questions ―What is?‖ or
―What will be?‖
a. For example: What is the effect on poverty of a living wage ordinance? Or, What
is the effect on a city‘s costs of a living wage ordinance?
2. Normative analysis answers questions of ―What
ought to be?‖
a. For example: Should a city implement a living wage ordinance?
Teaching Tip
Tell the students that Mr. Alumni Bigbucks has donated 50 million dollars to the
university. The following question is an example of positive analysis: Should the
donation be used to build a new stadium or a state-of-the art library/technology
center? The following question is an example of normative analysis: What do they
think should be built and why?
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