Principles of economics (Chapter 1)

Editor's Notes

• #2: Dear Colleague, Thank you for using the Premium PowerPoints for Mankiw’s Principles of Economics. I update these approximately once per year, to update the data, fix any typos, and incorporate the best suggestions from users like yourself. If you have any suggestions, corrections, or feedback, please email me at [email_address]. Check the textbook’s website to make sure you’re always using the most recent version. In this area (the “notes” section), I occasionally include notes that are visible only to you and will not display during your presentation in class. In slides with data tables or charts, the notes area provides the source information (often a URL or web address to the original data). In other slides, the notes area provides information that might be helpful when teaching this material, particularly for new instructors and grad assistant teachers. For chapter 1, most instructors try to cover this chapter in a single class session (especially those that are teaching the second of a two-semester sequence). If you are teaching a “principles of microeconomics” course, you might consider skipping Principles 8-10, which deal with macroeconomics. Near the end of the chapter are four slides titled “FYI: How to Read Your Textbook.” In the notes section of these slides, I describe an in-class activity that teaches effective reading skills to students.
• #4: You might want to elaborate a bit on some of the points made here. Some examples: “How do people decide how much to work?” Time is scarce resource – there’s just not enough time to do everything we’d like to do. How do we decide how much of our time to spend working? There’s a tradeoff: the more time we spend working, the higher our income, and therefore the more stuff we can buy. But, the more time we spend working, the less time we have for leisure – hanging out with friends, going hiking, watching movies, etc. (You might want to ask your students how THEY decide how much time to spend working. Some will say it depends on how many classes they are taking, or the time requirements of the available jobs. But probably at least a few will say the wage – the higher the wage, the more worthwhile to work.) “How do firms decide what kind of labor to hire?” Firms can hire unskilled or skilled workers. The skilled workers are more productive, but cost more than the unskilled workers. “How do firms decide how much to produce?” Ask your students, and see if any of them say “it depends on the price of the product they sell.” (Probably some will say “it depends on whether there’s a lot of demand for the product”. To which you might respond “and if there’s a lot of demand for the product, what does that mean for the price that firms can get for the product?”)
• #5: Decision-making is at the heart of economics. The individual must decide how much to save for retirement, how much to spend on different goods and services, how many hours a week to work. The firm must decide how much to produce, what kind of labor to hire. Society as a whole must decide how much to spend on national defense (“guns”) versus how much to spend on consumer goods (“butter”).
• #7: HEADS UP. The 5th edition uses “equality.” The fourth and earlier editions used “equity” here. You may want to elaborate verbally on the last bullet to insure that the point is clear. “Redistribute income from wealthy to poor” is accomplished through the progressive tax system, as well as social programs like food stamps and unemployment insurance that try to provide a safety net for people at the low end of the income distribution. “But this reduces the incentive to work” – the reward for working hard is a high income. Taxes reduce this reward, and therefore reduce the incentive to work hard.
• #9: Here’s a fun tangent if you have the class time and are so inclined: Ask your students about the saying “The best things in life are free.” Ask them to name some of these things that supposedly are free. Ask them what “free” means in this context. The idea here is to get them to see that even things without an explicit monetary cost are not truly “free” because they have an opportunity cost. For example, when you ask them to name the “best things” that are “free,” they will respond with answers like love, sitting at the top of a mountain you just climbed and enjoying an awesome view, or maybe witnessing the joy of a child who has just been given a new toy. In each case, there is no explicit monetary cost, but there’s an opportunity cost. For example, a day spent climbing a mountain represents a day of foregone wages. And the fact that the mountain offers the incredible view probably means that land has been set aside for a national park that might otherwise have been used to produce industrial chemicals, or for a subdivision of million-dollar homes. With love, it’s less obvious, but if prodded enough, your students will be able to think of non-monetary costs associated with love. For example, you might not want to see the latest Ashton Kutcher film, you might think he’s the world’s worst actor. But your boyfriend/girlfriend/teenage daughter or other loved one is DYING to see it, they are BEGGING you to take them. So you take them. That’s true love, don’t you think? And it’s certainly not free.
• #11: See the textbook for two classic examples: 1. The diamond-water paradox: water is essential for life but virtually free; diamonds are inessential but expensive. 2. The near-zero marginal cost of an airline taking an extra passenger when the flight isn’t full.
• #13: Most of these PowerPoint chapters have two or three Active Learning activities. They break up the lecture with a short in-class activity for immediate reinforcement, application, or assessment of the material in the preceding slides. A good idea is to give students time to formulate their answers before asking for volunteers to share their answers with the class. When the questions or exercises are more complex, consider having them work in pairs. Digression on class participation: In general, it’s not a good idea to try to solicit participation by saying “Now who can tell me the answer to….”. The invariable result is regular participation by very few students – the quick thinkers who have the confidence to answer spontaneously in front of the class – while most students remain silent. When students have a bit of time to think through their answers, they are more likely to be comfortable sharing their answers with you and the class. Even better: try a simple, time-tested activity called “THINK-PAIR-SHARE.” Pair students up. Pose a question or problem. Have students work on the problem individually for a couple minutes. Then, allow a couple minutes to work in pairs: each student tries to explain to the other why his or her answer is correct, and the other offers feedback. In many cases, they come up with better answers by working together. Finally, ask for volunteers. Students are much more likely to participate since they have had the opportunity to “test” their answers on a classmate. And those who do not participate will at least have had the chance to share their answer with, and get feedback from, one other student. Activities like these are useful to break up a lecture every 20 minutes or so. They help maintain students’ attention spans, and increase their comprehension of the material you cover. These activities are also useful for quick, informal assessment – often, they will alert you to problems (such as students not getting what you think they’re getting) which you can then correct before moving on to cover additional material. End of digression.
• #15: If you wish, you can omit this slide and just give this information to the class verbally.
• #16: Whether we’re talking about the U.S. economy, or the local economy, the term “economy” simply means a group of people interacting with each other. These interactions play a critical role in the allocation of society’s scarce resources. For example, the interaction of buyers and sellers determines the prices of goods and the amounts produced and sold. These interactions are an important part of what economists study.
• #17: If each person had to grow his own food, make his own clothes, cut his own hair, we would have a world full of skinny, unfashionable poor people having bad hair days every day of the week. It’s far more efficient for each person to specialize in producing a good or service, and then exchanging it with other people for the things they produce. The statement “trade can make everyone better off” should not be hard to understand, if you think about it for a moment: Each of two parties would not voluntarily enter into an exchange if it made either of them worse off, now would they? The same principles apply at the national and international level: International trade allows countries to sell their exports abroad and get a higher price, and to buy things from abroad more cheaply than they could produce at home. In addition, trade gives a country’s consumers access to a greater variety of goods – including goods they might not be able to get at all. For example, U.S. consumers enjoy a variety of fresh produce year-round. This would not be possible without international trade.
• #18: A market economy is “decentralized,” meaning that there is no government committee that makes the decisions about what goods to produce and so forth. Instead, many households and firms make their own decisions: * Each of many households decides who to work for and what goods to buy. * Each of many firms decides whom to hire and what goods to produce.
• #19: In all versions of this textbook except Brief Principles of Macroeconomics, market efficiency and the invisible hand are covered more thoroughly in Chapter 7.
• #21: [“Govt” is an abbreviation for government. Throughout all of the Premium PowerPoint chapters, I try to use abbreviations the way a thoughtful instructor would use them if writing on a chalkboard. If you prefer to spell the word out, just use your mouse to highlight “govt” and then type out the full word.] Two examples of the idea in the second bullet point: A restaurant won’t serve meals if customers do not pay before they leave. A music company won’t produce CDs if too many people avoid paying by making illegal copies. Many fledging market economies are struggling through the transition from central planning because they have not developed institutions that protect and enforce property rights. The British news magazine The Economist has lots of current examples of this. An older but still interesting example comes from a column that Mankiw wrote in the June 12, 2000 issue of Fortune magazine entitled “Ukraine: How Not To Run An Economy.”
• #24: The items in this list are meant to get students thinking about Principles 6 and 7 in the context of specific examples, and to generate discussion rather than arrive at definitive answers. NOTE: Discussing the entire list would consume a lot of class time (20-25 minutes). Two would suffice. Pick your favorite two and delete the others. Of course, you can skip this slide entirely if you wish to get through the chapter as quickly as possible. Here are some notes which might help guide the discussion: a. Public schools. The alternative would be private schools. The cost of education would be concentrated among those with school-aged children, rather than spread over all taxpayers, so the price per child would likely be high. Some families would not be able to afford to enroll their children in schools, and would either home-school the children or raise them without education. Is the benefit to society of having an educated population large enough to justify making people without children share in the cost? Could the private sector provide education more efficiently (either at lower cost or higher quality) than the public sector? b. Workplace safety regulations. Without such regulations, would firms provide a safe environment for their workers? Some students will say “no – look at how bad working conditions are in poor countries which have no safety regulations.” Another view is dropping such regulations would make workers better off. Workers may view the safety of their work environment as part of their wage: the less safe the environment at a specific firm, the higher the wage the firm will have to offer to make workers willing to work there. If workers vary with respect to their tolerance for unsafe conditions, then workers with a high risk tolerance would be better off if given the option to work for higher wages in factories that aren’t as safe. Such workers would be worse off if the government required all firms to provide equally safe conditions. c. Public highways. The alternative would be toll highways operated by the private sector. People who use highways more would pay more, and people that use them less would pay less, which seems fairer than having everyone pay equally for highways. (Actually, everyone does not pay equally - people who use public roads more buy more gas, and therefore pay more gas tax.) If there are external benefits to society of having a national highway system, then the private sector would under-provide this good. d. Patent laws. I’ve kind of loaded the question with the wording on the slide. If you wish, change it to just “Patent laws.” Is it fair that drug companies charge such high prices for drugs that some people need to stay alive? If drug prices are regulated, how might pharmaceutical firms respond?
• #26: “Rich countries” refers to countries like the U.S., Japan, and Germany. “Poor countries” refers to countries like India, Indonesia, and Nigeria.
• #29: While the long-run effect of increasing the quantity of money is inflation, the short-run effects are more complicated - and controversial. However, most mainstream economists believe the following: An increase in the quantity of money causes spending to rise, which causes prices to rise, which induces firms to produce more goods and services, which requires that they hire more workers. Hence, in the short-run, increasing the quantity of money causes inflation to rise, but unemployment to fall. Of course, REDUCING the quantity of money would have the opposite effects (inflation would fall, while unemployment would rise) in the short run. Keep in mind, though, the lesson from Principle #9: In the long run, changing the quantity of money only affects inflation. We will learn in a later chapter what determines the rate of unemployment in the long run, and we will see that it has nothing to do with the quantity of money. The second bullet addresses the following point: In some decades, due to factors outside of the control of policymakers, inflation and unemployment are both high (e.g. 1970s) – or low (e.g. 1990s). Yet, given these other factors, policymakers can always reduce unemployment temporarily by creating more inflation, or vice versa.
• #30: Most new college students have not been taught good study skills, yet we professors often assume they have such skills. This is the first of four slides that summarize an FYI box which describes proven strategies for learning and retention. If you’re pressed for time, you can of course skip these slides, but please urge your students to read this FYI box. But if you can spare 30 minutes of class time, there’s a very effective activity you can do in class which lets students see for themselves the power of active reading and teaching a partner. I describe this activity in the notes section of the fourth “FYI: How to Read Your Textbook” slide. This activity could replace showing these four slides in class, though your students should still read the corresponding FYI box in the book.
• #31: If you do not like “They are often good practice for the exams,” please feel free to delete it. I’ve found, though, that students are more motivated to work practice problems when they think that doing so will help them earn a higher score on the exam.
• #32: If your classroom computer has a live internet connection, you should be able to click on the link and visit the textbook’s website. It’s worth taking 2-3 minutes of class time to show students the resources there.
• #33: Here’s the activity I mentioned a few slides back. I have used it many times with terrific results. Find two newspaper articles on topical economic issues. The articles must be (1) short enough that a beginning college student can read either of them in 10 minutes or less, (2) appropriate for the lay reader, and (3) very interesting. Make enough copies for all students in your class. Use different colored paper for each article, e.g. yellow for Article 1 and blue for Article 2. In class, instruct students to pair up. In each student pair, one student is assigned Article 1, the other assigned Article 2. Tell students they will have 15 minutes to read their assigned article. Then, each student will have 5 minutes to teach the contents of his or her article to his or her partner. Tell students it is not acceptable to merely give a paragraph-by-paragraph summary when teaching their articles to their partner. Use your timer or a watch to announce when the 15 minutes are up and it’s time to start teaching. Five minutes later, announce when it’s time for the other student to teach his/her article. Five minutes later, stop the activity and re-group as a class. Ask your students the following four questions. 1) “How did you read your article, knowing that you were going to have to teach it to someone in a few minutes? Did you read it the same way as when you’re reading the paper on your own? Explain.” Ssummarize their responses on the board; you should come up with a list that includes the techniques they used to read the article. It will include things like “I took notes,” “I tried to identify the main point and the supporting information,” “I kept going back and re-reading sections of the article,” or “I kept jumping around the article, looking for connections.” After taking students responses, you can add a couple of your own if you like. 2) “Having read the article using these techniques, do you think you learned more from it and will retain more than if you read the article they way you would when you’re reading the paper on your own? Explain.” There should be a consensus that, yes, using these techniques leads to more learning and better retention. 3) “Are there any other contexts in which you might benefit from using these techniques while reading?” The students should realize the obvious answer: reading their textbooks.
• #34: Each Premium PowerPoint chapter ends with a summary similar to the textbook’s chapter summaries. Many instructors do not cover these chapter summaries in class.