1.5 Review and Practice
Summary
Economists study the choices that people make—choices that are forced on us by scarcity. Scarce goods are those for which the choice of one alternative requires giving up another. The opportunity cost of any choice is the value of the best alternative forgone in making that choice.
Some key choices assessed by economists include what to produce, how to produce it, and for whom it should be produced. Economics is distinguished from other academic disciplines that also study choices by its emphasis on the central importance of opportunity costs in evaluating choices, the assumption of optimizing behavior that serves the interests of individual decision makers, and its focus on evaluating choices at the margin.
Economic analyses may be aimed at explaining individual choice or choices in an individual market; such investigations are largely the focus of microeconomics. The analysis of the impact of those individual choices on such aggregates as total output, the level of employment, and the price level is the focus of macroeconomics.
Working within the framework of the scientific method, economists formulate hypotheses and then test them. These tests can only refute a hypothesis; hypotheses in science cannot be proved. A hypothesis that has been widely tested often comes to be regarded as a theory; one that has won virtually universal acceptance is a law. Because of the complexity of the real world, economists rely on models that rest on a series of simplifying assumptions. The models are used to generate hypotheses about the economy that can be tested using real-world data.
Statements of fact and hypotheses are positive statements. Normative statements, unlike positive statements, cannot be tested, and they provide a source for potential disagreement.
Concept Problems
Why does the fact that something is scarce require us to make choices?
Does the fact that something is abundant mean it is not scarce in the economic sense? Why or why not?
In some countries, such as Cuba and North Korea, the government makes most of the decisions about what will be produced, how it will be produced, and for whom. Does the fact that these choices are made by the government eliminate scarcity in these countries? Why or why not?
Explain what is meant by the opportunity cost of a choice.
(Related to “Try It!” in Section 1.2.) What is the approximate dollar price of the tuition and other fees associated with the economics course you are taking? Does this dollar cost fully reflect the opportunity cost to you of taking the course?
Indicate whether each of the following is a topic of microeconomics or macroeconomics:
The impact of higher oil prices on the production of steel
The increased demand in the last 15 years for exotic dietary supplements
The surge in aggregate economic activity that hit much of Asia late in the early 2000s
The sharp increases in U.S. employment and total output that occurred between 2003 and 2007
The impact of preservation of wilderness areas on the logging industry and on the price of lumber
Determine whether each of the following raises a “what,” “how,” or “for whom” issue. Are the statements normative or positive?
A requirement that aluminum used in cars be made from recycled materials will raise the price of automobiles.
The federal government reduces the eligibility age for Medicare from 65 to 60.
An increase in police resources provided to the inner city will lower the crime rate.
Automation destroys jobs.
Efforts to improve the environment tend to reduce production and employment.
Japanese firms should be more willing to hire additional workers when production rises and to lay off workers when production falls.
Access to health care should not be limited by income.
(Related to “Case in Point: Economics Scores Big in Professional Soccer” in Section 1.3.) In this case, professional soccer players behaved in much the same way that economic theory predicted they would. Why do you suppose they came so close? Would you expect the same behavior from kids in a youth soccer league in your town or city? Why or why not?
(Related to “Case in Point: Economics Scores Big in Professional Soccer” in Section 1.3.) Explain how kickers and goalies likely arrived at the optimal blend of left and right through a series of marginal decisions.
Most college students are under age 25. Give two explanations for this—one based on the benefits people of different ages are likely to receive from higher education and one based on the opportunity costs of a college education to students of different ages.
(Related to “Try It!” in Section 1.3.) Some municipal water companies charge customers a flat fee each month, regardless of the amount of water they consume. Others meter water use and charge according to the quantity of water customers use. Compare the way the two systems affect the cost of water use at the margin.
How might you test each of the following hypotheses? Suggest some problems that might arise in each test due to the ceteris paribus (all-other-things-unchanged) problem and the fallacy of false cause.
Reducing the quantity of heroin available will increase total spending on heroin and increase the crime rate.
Higher incomes make people happier.
Higher incomes make people live longer.
Many models in physics and in chemistry assume the existence of a perfect vacuum (that is, a space entirely empty of matter). Yet we know that a perfect vacuum cannot exist. Are such models valid? Why are models based on assumptions that are essentially incorrect?
Suppose you were asked to test the proposition that publishing students’ teacher evaluations causes grade inflation. What evidence might you want to consider? How would the inability to carry out controlled experiments make your analysis more difficult?
(Related to “Case in Point: Does Baldness Cause Heart Disease?” in Section 1.4.) Explain the possible fallacy of false cause in concluding that baldness makes a person more likely to have heart disease.
(Related to “Case in Point: The Opportunity Cost of COVID-19” in Section 1.2.) In early 2021, several European countries removed access to the Oxford-Astra Zeneca COVID-19 vaccine because of worries that it might be linked to an increased risk of blood clots. Explain the trade-off regulators faced.
(Related to “Case in Point: The Opportunity Cost of COVID-19” in Section 1.2.) In late 2020, the U.S. began its long COVID-19 vaccine rollout. Each state developed its own plan, and had to prioritize access to the scarce vaccine. Discuss the trade-offs, costs, and benefits inherent in these two options:
Begin the vaccination program by providing vaccine to older adults, who are most vulnerable.
Begin the vaccination program by providing vaccine to the young, who are the most likely to spread the disease to others.
(Related to “Try It!” in Section 1.4.) Doctors have noticed that monthly sales of ice cream are positively related to the number of drownings. “Didn’t your mother tell you to wait 30 minutes after eating before you jump in the pool?” Explain the nature of causation in this observation.
(Related to “Pop! Goes the Econ: Mike Rowe on Human Capital” in Section 2.2.) Many people are currently arguing that more people should reconsider going to college in favor of going to a 2-year trade school for certification as an electrician, HVAC installer, or similar occupation. At the same time, the typical college graduate earns about $1.80 for each dollar earned by someone without a college degree.
Explain the trade-off involved.
What kind of data might you need to see whether going to college is a good financial decision?
What other factors (beyond the financial payoff) might you consider in evaluating whether college is a better choice than trade school?
(Related to “Try It!” in Section 1.3.) The U.S.D.A.’s analysis indicates that a family’s second child is about 25% less costly to raise than that family’s first child. Why might a second child be less expensive to raise, at the margin, than a first child?
(Related to “Pop! Goes the Econ: The Human Condition in The Greatest Showman ” in Section 1.2.) How does the song in this video from The Greatest Showman illustrate the notion of scarcity?
(Related to “Pop! Goes the Econ: Allocation and The Hunger Games ” in Section 1.2.) What allocation mechanism(s) is Panem using to distribute housing and food? (If you’re familiar with the story, how are nonparticipants allocated food and housing?)
(Related to “Pop! Goes the Econ: Opportunity Cost in Better Call Saul ” in Section 1.2.) Explain how Jimmy McGill uses his understanding of basic economics to convince Neff Copiers to hire him.
(Related to “Pop! Goes the Econ: Ferris Bueller Optimizes” in Section 1.3.) Explain how the clip illustrates the idea of optimization. Then, see if you can locate and explain Ferris Bueller’s use of marginal analysis.
(Related to “Pop! Goes the Econ: Are Super Troopers Good Marginal Thinkers?” in Section 1.3.) Explain the marginal analysis in this video clip. Then, offer your educated opinion on whether Farva is acting like a good economist would. Bonus points if you can back up your conclusions with numbers!
(Related to “Pop! Goes the Econ: The Relentless Pursuit of Greater Efficiency” in Section 1.3.) Many people describe the fundamental economic problem as squeezing the greatest possible value out of the fewest possible resources. How do time and motion studies help achieve that end?
(Related to “Pop! Goes the Econ: Friends and the Fallacy of False Cause ” in Section 1.4.) Suppose Rachel moving in is “Event A,” while Joey’s fridge failing is “Event B.”
Does Event A cause Event B? Does Event B cause Event A?
Is there a third event, “Event C,” that causes Rachel to move in and Joey’s fridge to fail?
What is the likely explanation for these two events happening at the same time? Is this an illustration of the fallacy of false cause? Explain.