Chapter 1: Introduction
Overview
What Economics Is About
Uses of Economic Theory
The Scope of Economics
Individuals, Families, and Households
A Note on Terminology
Outline of the Book
Appendix: A Review of Supply and Demand in the Labor Market
Suggested Answers to End of Chapter Questions
Notes to Users:
,The answers that follow should be regarded only as a starting point for complete answers. Complete answers may vary in
length and content, depending on the instructors’ emphasis in the course and any additional readings made available to
students. In addition, some questions call for students to argue for a particular position, speculate about an issue, or draw
from their own experience. In these cases, we have sometimes simply indicated the types of factors students might discuss in
their answers. In other instances we have sketched out one possible answer, but other alternatives may also be acceptable.
1. Define scarcity and explain why the concept is so central to neoclassical economics.
A commodity is scarce if there is not enough of it for everyone to get as much as they would like to have of it if it
were freely available. (Note, this does not mean that there is not enough available for everyone to buy as much as
they want to at the current price). A central concern of economics is the efficient allocation and use of resources
because otherwise we will not get the most out of our resources and the composition of output will not be optimal
given people’s preferences. If, however, the commodity is not scarce, there need be no concern about the efficient
allocation of this commodity.
2. In everyday language cost generally means the amount of money it takes to
purchase a commodity. Can this meaning be tied to the concept of opportunity cost
and, if so, how?
The opportunity cost of any commodity is the resources (raw materials, equipment,
and labor) used to produce it that are not available to produce other commodities.
Similarly, from the consumer’s perspective the money spent to purchase one
commodity is not available to purchase another.
3. Discuss the uses and abuses of simplifying assumptions in economic models.
As suggested in the chapter, economists often find it useful to develop models that
abstract from the complications of the real world in order to focus in on the effect of
changing one or more variables. For instance, we might look at the effect of an increase
in the wages paid to scientists in the private sector on the labor market for science
teachers holding other factors that might affect the labor market for science teachers
constant, such as the number of school-age children. This type of simplifying
assumption, which helps us to focus attention on the direct effect of this change (i.e., the
increase in wages), is a very useful and generally accepted approach. On the other hand,
, sometimes simplifying assumptions may inadequately reflect the real world and lead us
to mistaken conclusions. For instance, until the early 1980s, economists largely
accepted the assumption that husbands and wives have the same preferences or that
the husband is an altruistic decisionmaker for the family. This would suggest that only
total household resources matter in determining family consumption, not who controls
the resources. However, in more recent years, the common preference assumption has
been challenged, and there is evidence that family consumption patterns do in fact differ
depending on who controls family resources.
4. Using a graph, show how each of the following labor markets (assumed to be
competitive and initially in equilibrium) is affected by the following changes. Clearly
explain your reasoning.
a. Labor market for math and science teachers.
Wages available in private industries utilizing these skills rise.
This change decreases the supply of teachers to the math and science market
because now they have relatively better opportunities elsewhere. The supply
curve for math and science teachers shifts to the left, causing the equilibrium
wage to rise and the equilibrium number of teachers to fall.
b. Labor market for university professors.
College enrollments expand.
, This change increases the demand for university professors because labor is
a derived demand -- it depends on demand in the output (product) market
(in this case, the market for higher education). The demand curve for
university professors shifts to the right, causing their equilibrium wage to
rise and the equilibrium number of professors to rise.
a. Labor market for low-skilled workers.
The 1996 federal welfare legislation requires that a much larger fraction of
welfare recipients work than in the past.
This change increases the supply of low-skilled workers because welfare
recipients tend to have lower levels of education, on average. As they are
required to seek employment, they will compete for jobs with other lower
skilled workers. The supply curve for low-skilled workers shifts to the right,
causing their equilibrium wage to fall and the equilibrium number of low-skilled
workers employed to rise.
d. Labor market for workers who completed high school only.
The workplace becomes more computerized and technically sophisticated.
It is commonly believed that computers and less skilled workers are gross
substitutes in production. Hence, increased computerization is expected to
reduce the demand for high school-educated workers. The demand curve for
these workers shifts to the left, causing their equilibrium wage to fall and the
equilibrium number of less-skilled workers hired to fall.
e. Labor market for workers who completed college or more.
Overview
What Economics Is About
Uses of Economic Theory
The Scope of Economics
Individuals, Families, and Households
A Note on Terminology
Outline of the Book
Appendix: A Review of Supply and Demand in the Labor Market
Suggested Answers to End of Chapter Questions
Notes to Users:
,The answers that follow should be regarded only as a starting point for complete answers. Complete answers may vary in
length and content, depending on the instructors’ emphasis in the course and any additional readings made available to
students. In addition, some questions call for students to argue for a particular position, speculate about an issue, or draw
from their own experience. In these cases, we have sometimes simply indicated the types of factors students might discuss in
their answers. In other instances we have sketched out one possible answer, but other alternatives may also be acceptable.
1. Define scarcity and explain why the concept is so central to neoclassical economics.
A commodity is scarce if there is not enough of it for everyone to get as much as they would like to have of it if it
were freely available. (Note, this does not mean that there is not enough available for everyone to buy as much as
they want to at the current price). A central concern of economics is the efficient allocation and use of resources
because otherwise we will not get the most out of our resources and the composition of output will not be optimal
given people’s preferences. If, however, the commodity is not scarce, there need be no concern about the efficient
allocation of this commodity.
2. In everyday language cost generally means the amount of money it takes to
purchase a commodity. Can this meaning be tied to the concept of opportunity cost
and, if so, how?
The opportunity cost of any commodity is the resources (raw materials, equipment,
and labor) used to produce it that are not available to produce other commodities.
Similarly, from the consumer’s perspective the money spent to purchase one
commodity is not available to purchase another.
3. Discuss the uses and abuses of simplifying assumptions in economic models.
As suggested in the chapter, economists often find it useful to develop models that
abstract from the complications of the real world in order to focus in on the effect of
changing one or more variables. For instance, we might look at the effect of an increase
in the wages paid to scientists in the private sector on the labor market for science
teachers holding other factors that might affect the labor market for science teachers
constant, such as the number of school-age children. This type of simplifying
assumption, which helps us to focus attention on the direct effect of this change (i.e., the
increase in wages), is a very useful and generally accepted approach. On the other hand,
, sometimes simplifying assumptions may inadequately reflect the real world and lead us
to mistaken conclusions. For instance, until the early 1980s, economists largely
accepted the assumption that husbands and wives have the same preferences or that
the husband is an altruistic decisionmaker for the family. This would suggest that only
total household resources matter in determining family consumption, not who controls
the resources. However, in more recent years, the common preference assumption has
been challenged, and there is evidence that family consumption patterns do in fact differ
depending on who controls family resources.
4. Using a graph, show how each of the following labor markets (assumed to be
competitive and initially in equilibrium) is affected by the following changes. Clearly
explain your reasoning.
a. Labor market for math and science teachers.
Wages available in private industries utilizing these skills rise.
This change decreases the supply of teachers to the math and science market
because now they have relatively better opportunities elsewhere. The supply
curve for math and science teachers shifts to the left, causing the equilibrium
wage to rise and the equilibrium number of teachers to fall.
b. Labor market for university professors.
College enrollments expand.
, This change increases the demand for university professors because labor is
a derived demand -- it depends on demand in the output (product) market
(in this case, the market for higher education). The demand curve for
university professors shifts to the right, causing their equilibrium wage to
rise and the equilibrium number of professors to rise.
a. Labor market for low-skilled workers.
The 1996 federal welfare legislation requires that a much larger fraction of
welfare recipients work than in the past.
This change increases the supply of low-skilled workers because welfare
recipients tend to have lower levels of education, on average. As they are
required to seek employment, they will compete for jobs with other lower
skilled workers. The supply curve for low-skilled workers shifts to the right,
causing their equilibrium wage to fall and the equilibrium number of low-skilled
workers employed to rise.
d. Labor market for workers who completed high school only.
The workplace becomes more computerized and technically sophisticated.
It is commonly believed that computers and less skilled workers are gross
substitutes in production. Hence, increased computerization is expected to
reduce the demand for high school-educated workers. The demand curve for
these workers shifts to the left, causing their equilibrium wage to fall and the
equilibrium number of less-skilled workers hired to fall.
e. Labor market for workers who completed college or more.
