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IMCH1new07 - Chapter 1 Thinking Like an Economist Chapter...

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Chapter 1 Thinking Like an Economist Chapter Summary The title of this chapter is "Thinking Like an Economist," and the chapter gets students to think about economic problems from the start. The text begins by explaining the notion of scarcity and choice; it makes clear that time and money are not the only scarce resources. The concept of choice leads directly to the weighing of marginal costs and marginal benefits. The answer to the question, Should I do activity X? is: if the benefits of that activity are greater than the costs [if B(X) > C(X)], then do X; otherwise don't. Understanding the importance of marginal analysis is central to sound economic reasoning. From here, the chapter points out the pitfalls that are likely when making decisions. Ignoring implicit opportunity costs, failing to ignore sunk costs, and confusing average and marginal distinctions are common mistakes made when making choices. The next few sections develop the notion of rationality and the rational economic person. The rational choice approach is helpful in understanding and modeling some behavior, but it is not a prescription for practical living. The chapter concludes with a discussion of positive and normative economics and the distinction between microeconomics and macroeconomics. Chapter Outline Scarcity and Choice The Cost-Benefit Approach to Decisions The Role of Economic Theory Some Common Pitfalls in Decision Making The Invisible Hand Would Parents Want Their Daughter or Son to Marry Homo Economicus? The Economic Naturalist Positive Questions and Normative Questions Microeconomics and Macroeconomics Summary
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CHAPTER 1: Thinking like an economist Teaching Suggestions 1. Begin the term with a view of the "forest" _ the course seen as a whole. It is very easy to get lost in the "trees" of individual topics, especially when it takes three weeks to derive a demand curve. I like to use a flow-chart which I come back to at various times during the term to make sure students know where we were and where we are going next. The chart below is an example of what might work. The Forest and the Trees Consumer Theory Subjective Value Production Theory Cost of Production Theory of Decision Making Supply and Demand of Market Inputs General Equilibrium and a Theory of Economic Welfare (MC = MB) Industrial Organization 1. Perfect Competition 2. Monopoly 3. Monopolistic Competition 4. Oligopoly Revenue of Producer Individual Demand Market Demand Product Markets Pricing in 2. One of the strengths of the Microeconomics and Behavior book is its recognition that economic thinking does not predict as much human behavior as the "rational choice" stereotype might have students believe. This means that the methodology of economics is very important to understand. I find it important to stress at least three very important assumptions of the rational choice model.
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