Instructor Manual: James Gwartney, Economics Private and Public Choice, 18e, 9798214041339, ©2026; Chapter 1: The Economic Approach
Instructor Manual
James Gwartney, Economics Private and Public Choice, 18e, 9798214041339, ©2026;
Chapter 1: The Economic Approach
TABLE OF CONTENTS
Purpose and Perspective of the Chapter......................................................................2
Chapter Objectives........................................................................................................2
Teaching Suggestions....................................................................................................2
Chapter Outline.............................................................................................................5
Hints for Answering Critical Analysis Questions........................................................8
© 2026 Cengage Learning, Inc. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a 1
publicly accessible website, in whole or in part.
, Instructor Manual: James Gwartney, Economics Private and Public Choice, 18e, 9798214041339, ©2026; Chapter 1: The Economic Approach
PURPOSE AND PERSPECTIVE OF THE CHAPTER
The purpose of this chapter is to introduce the student to the economic way of thinking. Understanding
the concept of scarcity and the importance of personal incentives is a critical foundation to build on as
students study economics.
While many of your students will easily grasp the basics of the economic way of thinking, others will
need additional examples and illustrations before they understand the essentials. The concepts of scarcity,
economizing behavior, and incentives are so important, they are worth an entire lecture. Use several
illustrations to highlight the impact on human behavior of changes in personal benefits or costs.
Introductory students tend to associate economics with business decision making. We must illustrate to
them that the basic principles of economics and personal incentives influence all of human decision
making, including choices in the political and social spheres. You may also want to contrast the
methodology of economics with that of other social sciences and the physical sciences. Discuss both the
similarities and differences.
CHAPTER OBJECTIVES
The following objectives are addressed in this chapter:
1.1 Explain the concept of scarcity and why it requires people to make choices.
1.2 Differentiate between scarcity and poverty.
1.3 Explain the eight key elements of the economic way of thinking.
1.4 Explain why the basic postulate of economics provides the foundation for the power of
economics.
1.5 Differentiate between positive and normative economics.
1.6 Identify the factors that may cause people to arrive at fallacious economic conclusions.
1.7 Identify Adam Smith and his influence on modern economics.
TEACHING SUGGESTIONS
Please take note of the following points and teaching suggestions for integration with your course
delivery of this chapter:
1. Be sure to distinguish clearly between scarcity and poverty (and shortages, once supply and demand
have been covered). Anything that we would like to have more of at no cost is scarce. Thus, almost
everything from clean air to leisure time to the ingenuity necessary to make other resources useful is
scarce. Poverty is defined as failure to attain some minimum level of income. Poverty can
conceivably be eliminated, whereas scarcity persists since goods are scarce for both the rich and the
poor. A shortage is present when purchasers would like to buy more than is available at the current
price.
2. Introducing the subject of incentives, one can readily emphasize the importance and generality of this
basic principle of economics. When an activity is made more costly, people will be less likely to
choose it. Similarly, when the benefits derived from an event increase, people will be more likely to
undertake it. Numerous examples can illustrate this concept. How does hot weather influence one’s
decision to do without air-conditioning (or a swimming pool)? How does rewarding class attendance
© 2026 Cengage Learning, Inc. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a 2
publicly accessible website, in whole or in part.
, Instructor Manual: James Gwartney, Economics Private and Public Choice, 18e, 9798214041339, ©2026; Chapter 1: The Economic Approach
with higher grades influence one’s decision to go to class? How does the grading policy of the
instructor influence a student’s incentive to study?
3. Discuss the meaning of “the margin” with students. Use non-economic examples to help clarify the
idea. For example, ask students how an additional outstanding running back will influence the quality
of a football team. (This is a marginal change.) If the running back position was previously a team
weakness, the new player may make a substantial difference. On the other hand, if the team was
already strong at this position, the new player may exert little influence on the overall performance of
the team. Indicate clearly the difference between (a) the overall performance of the team (a total
concept) and (b) the change that results from the addition of the new player (a marginal concept).
4. A good way of illustrating the search for information is to ask students how long they would search
for a $50 bill. If your time had an opportunity cost of $10, you would look as long as you thought the
probability of finding the bill in the next hour was at least 1/5. (The answer is not five hours in this
case, because time already spent searching is then a sunk cost. A person could look well more or less
than five hours.)
5. Give examples of actions that have secondary effects. What are the secondary effects of overeating?
Lack of adequate sleep? Restricting trade with Japan? Fixing the price of wheat at $6 per bushel?
6. Emphasize both the theory and empirical parts of economics. Many professional economists are
engaged in the continual testing of various aspects of economic theory. Discuss how economic theory
is tested. Indicate real-world events that have convinced economists to modify their theories. Two
examples of the latter are:
a. the impact of the Great Depression on the theory that wage and price flexibility quickly restores
full employment.
b. the economic events of the 1970s on the theory that moderate inflation enables us to permanently
attain low levels of unemployment.
7. Discuss the distinctions between positive and normative economics. Point out that positive economic
statements are testable, whereas normative statements are not. Give several illustrations of both
positive and normative economic statements. The following are examples of positive economic
statements:
a. “If the price of wheat rose, buyers would purchase less of it.”
b. “Nations that import substantial amounts of crude oil will experience inflation when crude oil
prices rise.” (Although this may or may not be true, it is nonetheless a positive statement.)
c. “An increase in government borrowing will cause interest rates to rise.”
The following are examples of normative statements:
a. “The price of wheat is too high.”
b. “The United States should impose price controls on domestic oil producers if the price of foreign
oil rises.”
c. “It is wrong for lenders to charge higher interest rates to those who live in poverty than they
charge the low-credit-risk customers.”
8. It is important to emphasize that association is not the same thing as causation. Discuss the following
points with regard to this point.
a. Regions with higher minimum wages also tend to have lower unemployment rates.
b. High crude oil prices caused the inflation experienced by the United States during the 1970s.
c. The post-World War II baby boom caused the prosperity of the period from 1946 to 1965.
d. War causes inflation.
9. Provide examples that illustrate the fallacy of composition, such as the following statements:
© 2026 Cengage Learning, Inc. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a 3
publicly accessible website, in whole or in part.
, Instructor Manual: James Gwartney, Economics Private and Public Choice, 18e, 9798214041339, ©2026; Chapter 1: The Economic Approach
a. “Total output remains virtually unchanged whether I work or not; thus, output is largely
unaffected by whether or not people work.”
b. “I am no more likely to have an accident by driving ten miles over the speed limit than by
obeying the limit. Thus, even if everyone drove 10 miles over the speed limit, the number of
automobile accidents would not change.”
c. “A Kansas wheat farmer doubled their income this year when they doubled their production of
wheat. If all wheat farmers doubled their production of wheat, they could double their annual
income.”
10. The Critical Analysis questions at the end of each chapter are very useful in getting students to think
more clearly about issues and events in the real world. Frequently, they can be used to also stimulate
classroom discussion. Our experience suggests that only by using the economic way of thinking can
most students really learn it.
11. A bird-watching analogy can help students understand the usefulness of the economic way of
thinking. A birdwatchers’ training and experience direct them “where to look” to spot various birds,
the economic way of thinking directs students to think about decision makers’ incentives to
understand the predictable consequences of actions and policies. This is why those trained in
economics can often find predictable policy consequences that others are unable to grasp very easily.
12. Another analogy that can help students understand the power of the economic way of thinking is the
framing of a building. Just as buildings will not be structurally sound if the framing is not done
correctly, economic analysis will be faulty unless it is built on the framework of the set of incentives
faced by the relevant decision makers. This is why economists spend so much effort trying to
properly specify the incentives facing the actors involved, because predictions that are inconsistent
with actors’ incentives are likely to be incorrect.
13. In talking about choices and costs, one helpful illustration is to show that sometimes it is cheaper to
make some mistakes than to be right all of the time. This is true whenever the costs associated with
being wrong a certain fraction of the time are expected to be low compared to the costs of avoiding
such mistakes (although these expectations themselves may prove incorrect). Examples run the gamut
from dating (you have to meet many people before finding the right match), to exams (you don’t
generally want to incur the costs to get every problem on an exam correct because you can miss some
and still get an A), to buying “off brands” when shopping (where you trade off lower prices for
greater risks of unsatisfactory product performance).
[return to top]
CHAPTER OUTLINE
The following outline organizes activities (including any existing discussion questions in PowerPoints or
other supplements) by topic, so that you can see how all the content relates to the topics covered in the
text.
I. What Is Economics About? (slides 2-9)
a. Scarcity means having to make choices.
i. Scarcity and choice are the two essential ingredients of an economic topic.
ii. Scarcity is present whenever there is less of a good or resource freely available
than people would like.
1. Scarce goods are called economic goods.
© 2026 Cengage Learning, Inc. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a 4
publicly accessible website, in whole or in part.
Instructor Manual
James Gwartney, Economics Private and Public Choice, 18e, 9798214041339, ©2026;
Chapter 1: The Economic Approach
TABLE OF CONTENTS
Purpose and Perspective of the Chapter......................................................................2
Chapter Objectives........................................................................................................2
Teaching Suggestions....................................................................................................2
Chapter Outline.............................................................................................................5
Hints for Answering Critical Analysis Questions........................................................8
© 2026 Cengage Learning, Inc. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a 1
publicly accessible website, in whole or in part.
, Instructor Manual: James Gwartney, Economics Private and Public Choice, 18e, 9798214041339, ©2026; Chapter 1: The Economic Approach
PURPOSE AND PERSPECTIVE OF THE CHAPTER
The purpose of this chapter is to introduce the student to the economic way of thinking. Understanding
the concept of scarcity and the importance of personal incentives is a critical foundation to build on as
students study economics.
While many of your students will easily grasp the basics of the economic way of thinking, others will
need additional examples and illustrations before they understand the essentials. The concepts of scarcity,
economizing behavior, and incentives are so important, they are worth an entire lecture. Use several
illustrations to highlight the impact on human behavior of changes in personal benefits or costs.
Introductory students tend to associate economics with business decision making. We must illustrate to
them that the basic principles of economics and personal incentives influence all of human decision
making, including choices in the political and social spheres. You may also want to contrast the
methodology of economics with that of other social sciences and the physical sciences. Discuss both the
similarities and differences.
CHAPTER OBJECTIVES
The following objectives are addressed in this chapter:
1.1 Explain the concept of scarcity and why it requires people to make choices.
1.2 Differentiate between scarcity and poverty.
1.3 Explain the eight key elements of the economic way of thinking.
1.4 Explain why the basic postulate of economics provides the foundation for the power of
economics.
1.5 Differentiate between positive and normative economics.
1.6 Identify the factors that may cause people to arrive at fallacious economic conclusions.
1.7 Identify Adam Smith and his influence on modern economics.
TEACHING SUGGESTIONS
Please take note of the following points and teaching suggestions for integration with your course
delivery of this chapter:
1. Be sure to distinguish clearly between scarcity and poverty (and shortages, once supply and demand
have been covered). Anything that we would like to have more of at no cost is scarce. Thus, almost
everything from clean air to leisure time to the ingenuity necessary to make other resources useful is
scarce. Poverty is defined as failure to attain some minimum level of income. Poverty can
conceivably be eliminated, whereas scarcity persists since goods are scarce for both the rich and the
poor. A shortage is present when purchasers would like to buy more than is available at the current
price.
2. Introducing the subject of incentives, one can readily emphasize the importance and generality of this
basic principle of economics. When an activity is made more costly, people will be less likely to
choose it. Similarly, when the benefits derived from an event increase, people will be more likely to
undertake it. Numerous examples can illustrate this concept. How does hot weather influence one’s
decision to do without air-conditioning (or a swimming pool)? How does rewarding class attendance
© 2026 Cengage Learning, Inc. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a 2
publicly accessible website, in whole or in part.
, Instructor Manual: James Gwartney, Economics Private and Public Choice, 18e, 9798214041339, ©2026; Chapter 1: The Economic Approach
with higher grades influence one’s decision to go to class? How does the grading policy of the
instructor influence a student’s incentive to study?
3. Discuss the meaning of “the margin” with students. Use non-economic examples to help clarify the
idea. For example, ask students how an additional outstanding running back will influence the quality
of a football team. (This is a marginal change.) If the running back position was previously a team
weakness, the new player may make a substantial difference. On the other hand, if the team was
already strong at this position, the new player may exert little influence on the overall performance of
the team. Indicate clearly the difference between (a) the overall performance of the team (a total
concept) and (b) the change that results from the addition of the new player (a marginal concept).
4. A good way of illustrating the search for information is to ask students how long they would search
for a $50 bill. If your time had an opportunity cost of $10, you would look as long as you thought the
probability of finding the bill in the next hour was at least 1/5. (The answer is not five hours in this
case, because time already spent searching is then a sunk cost. A person could look well more or less
than five hours.)
5. Give examples of actions that have secondary effects. What are the secondary effects of overeating?
Lack of adequate sleep? Restricting trade with Japan? Fixing the price of wheat at $6 per bushel?
6. Emphasize both the theory and empirical parts of economics. Many professional economists are
engaged in the continual testing of various aspects of economic theory. Discuss how economic theory
is tested. Indicate real-world events that have convinced economists to modify their theories. Two
examples of the latter are:
a. the impact of the Great Depression on the theory that wage and price flexibility quickly restores
full employment.
b. the economic events of the 1970s on the theory that moderate inflation enables us to permanently
attain low levels of unemployment.
7. Discuss the distinctions between positive and normative economics. Point out that positive economic
statements are testable, whereas normative statements are not. Give several illustrations of both
positive and normative economic statements. The following are examples of positive economic
statements:
a. “If the price of wheat rose, buyers would purchase less of it.”
b. “Nations that import substantial amounts of crude oil will experience inflation when crude oil
prices rise.” (Although this may or may not be true, it is nonetheless a positive statement.)
c. “An increase in government borrowing will cause interest rates to rise.”
The following are examples of normative statements:
a. “The price of wheat is too high.”
b. “The United States should impose price controls on domestic oil producers if the price of foreign
oil rises.”
c. “It is wrong for lenders to charge higher interest rates to those who live in poverty than they
charge the low-credit-risk customers.”
8. It is important to emphasize that association is not the same thing as causation. Discuss the following
points with regard to this point.
a. Regions with higher minimum wages also tend to have lower unemployment rates.
b. High crude oil prices caused the inflation experienced by the United States during the 1970s.
c. The post-World War II baby boom caused the prosperity of the period from 1946 to 1965.
d. War causes inflation.
9. Provide examples that illustrate the fallacy of composition, such as the following statements:
© 2026 Cengage Learning, Inc. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a 3
publicly accessible website, in whole or in part.
, Instructor Manual: James Gwartney, Economics Private and Public Choice, 18e, 9798214041339, ©2026; Chapter 1: The Economic Approach
a. “Total output remains virtually unchanged whether I work or not; thus, output is largely
unaffected by whether or not people work.”
b. “I am no more likely to have an accident by driving ten miles over the speed limit than by
obeying the limit. Thus, even if everyone drove 10 miles over the speed limit, the number of
automobile accidents would not change.”
c. “A Kansas wheat farmer doubled their income this year when they doubled their production of
wheat. If all wheat farmers doubled their production of wheat, they could double their annual
income.”
10. The Critical Analysis questions at the end of each chapter are very useful in getting students to think
more clearly about issues and events in the real world. Frequently, they can be used to also stimulate
classroom discussion. Our experience suggests that only by using the economic way of thinking can
most students really learn it.
11. A bird-watching analogy can help students understand the usefulness of the economic way of
thinking. A birdwatchers’ training and experience direct them “where to look” to spot various birds,
the economic way of thinking directs students to think about decision makers’ incentives to
understand the predictable consequences of actions and policies. This is why those trained in
economics can often find predictable policy consequences that others are unable to grasp very easily.
12. Another analogy that can help students understand the power of the economic way of thinking is the
framing of a building. Just as buildings will not be structurally sound if the framing is not done
correctly, economic analysis will be faulty unless it is built on the framework of the set of incentives
faced by the relevant decision makers. This is why economists spend so much effort trying to
properly specify the incentives facing the actors involved, because predictions that are inconsistent
with actors’ incentives are likely to be incorrect.
13. In talking about choices and costs, one helpful illustration is to show that sometimes it is cheaper to
make some mistakes than to be right all of the time. This is true whenever the costs associated with
being wrong a certain fraction of the time are expected to be low compared to the costs of avoiding
such mistakes (although these expectations themselves may prove incorrect). Examples run the gamut
from dating (you have to meet many people before finding the right match), to exams (you don’t
generally want to incur the costs to get every problem on an exam correct because you can miss some
and still get an A), to buying “off brands” when shopping (where you trade off lower prices for
greater risks of unsatisfactory product performance).
[return to top]
CHAPTER OUTLINE
The following outline organizes activities (including any existing discussion questions in PowerPoints or
other supplements) by topic, so that you can see how all the content relates to the topics covered in the
text.
I. What Is Economics About? (slides 2-9)
a. Scarcity means having to make choices.
i. Scarcity and choice are the two essential ingredients of an economic topic.
ii. Scarcity is present whenever there is less of a good or resource freely available
than people would like.
1. Scarce goods are called economic goods.
© 2026 Cengage Learning, Inc. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a 4
publicly accessible website, in whole or in part.
