Williamson_3e_IM_04 - Chapter 4 Consumer and Firm Behavior:...

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Chapter 4 Consumer and Firm Behavior: The Work-Leisure Decision and Profit Maximization ± Teaching Goals The microeconomic approach to macroeconomics stresses the notion that economy-wide events are the result of decisions made by individuals. People work so that they may afford to buy market goods. On the other hand, people generally prefer to work less rather than working more. Although discussions in the popular press often refer to the idea that spending is what drives the economy, an economy cannot produce unless people are willing to work. Therefore, the most basic macroeconomic decision is the decision to choose whether, and how much, to work. Production and willingness to work are intrinsically interconnected. Students often believe that how much a person works is largely determined by the necessities of their circumstances. Students will report that they have to work to survive and pay tuition. Some might point out that some students need not work much or at all because their parents provide more support. However, circumstances need not dictate exactly how much they may choose to work. They may work less if they go to a less costly school. They may sometimes decide to switch to part-time student status and full-time work status if they find a high-paying job. A key message of this chapter is that choice is important and that choice is influenced by changes in circumstances. This chapter demands the mastery of a large body of structure and yet provides little in the way of immediate insights. Students may need frequent assurances that the mastery of this material eventually pays big dividends in providing hope of understanding the phenomenon of business cycles. This is particularly important as this chapter lays critical foundations for the rest of the book: the use of microfoundations in macroeconomics. Students need to be able to justify macroeconomic relationships with microeconomic arguments, like in this chapter. This requires to some extend some boring drills that they will come to appreciate only later. If for many textbooks the strategy is to teach one chapter a week, spend more time on this one, especially if students have not yet mastered intermediate microeconomics. Two key points of this chapter are the concepts of income and substitution effects. Often, students are perplexed at the amount of time spent on this material because nothing in practice is purely an income effect or a substitution effect. However, the two most basic insights of microeconomic analysis are that when we become more well-off we generally want more of everything and that we respond to price incentives at the margin. ± Classroom Discussion Topics Ask the students about their work choices and the choices of their parents, friends, and relatives. Does everyone work? Does everyone work the same amount of hours? Then ask the students for examples of the kinds of factors that lead people to work more or less. Try to elicit very specific examples. Then ask the students to categorize these factors that lead to more or less work. Some of these factors are
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Williamson_3e_IM_04 - Chapter 4 Consumer and Firm Behavior:...

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