Anthony Patrick OBrien

Microeconomics Seventh Edition R.Glenn Hubbard Anthony Patrick O’Brien Instructor’s Manual for Microeconomics Edward Scahill 1 / 4

CHAPTER 1 | Economics: Foundations

and Models Brief Chapter Summary and Learning Objectives 1.1 Three Key Economic Ideas (pages 4–8) Explain these three key economic ideas: People are rational; people respond to economic incentives; and optimal decisions are made at the margin.▪ Because resources are scarce, people must make choices to attain their goals.

1.2 The Economic Problem That Every Society Must Solve (pages 8–12) Discuss how an economy answers these questions: What goods and services will be produced? How will the goods and services be produced? Who will receive the goods and services produced?▪ Because of scarcity, producing more of one good or service means that less of some other good or service will be produced.

1.3 Economic Models (pages 12–16) Explain how economists use models to analyze economic events and government policies.▪ Economists use models—simplified versions of reality—to analyze real-world issues.

1.4 Microeconomics and Macroeconomics (page 16) Distinguish between microeconomics and macroeconomics.

1.5 Economic Skills and Economics as a Career (pages 16–17) Describe economics as a career and the key skills you can gain from studying economics.

1.6 A Preview of Important economic Terms (pages 17–19) Define important economic terms.

Appendix: Using Graphs and Formulas (pages 28–38)

Use graphs and formulas to analyze economic situations.Key Terms Allocative efficiency, p. 11. A state of the economy in which production is in accordance with consumer preferences; in particular, every good or service is produced up to the point where the last unit provides a marginal benefit to society equal to the marginal cost of producing it.Centrally planned economy, p. 10. An economy in which the government decides how economic resources will be allocated.Economic model, p. 4. A simplified version of reality used to analyze real-world economic situations.

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2 CHAPTER 1 | Economics: Foundations and Models

Economic variable, p. 13. Something measurable that can have different values, such as the number of people employed in manufacturing.Economics, p. 4. The study of the choices people make to attain their goals, given their scarce resources.Equity, p. 12. The fair distribution of economic benefits.Macroeconomics, p. 16. The study of the economy as a whole, including topics such as inflation, unemployment, and economic growth.Marginal analysis, p. 7. Analysis that involves comparing marginal benefits and marginal costs.Market, p. 4. A group of buyers and sellers of a good or service and the institution or arrangement by which they come together to trade.Market economy, p. 10. An economy in which the decisions of households and firms interacting in markets allocate economic resources.Microeconomics, p. 16. The study of how households and firms make choices, how they interact in markets, and how the government attempts to influence their choices.Mixed economy, p. 11. An economy in which most economic decisions result from the interaction of buyers and sellers in markets but in which the government plays a significant role in the allocation of resources.Normative analysis, p. 14. Analysis concerned with what ought to be.Opportunity cost, p. 9. The highest-valued alternative that must be given up to engage in an activity.Positive analysis, p. 14. Analysis concerned with what is.Productive efficiency, p. 11. A situation in which a good or service is produced at the lowest possible cost.Scarcity, p. 4. A situation in which unlimited wants exceed the limited resources available to fulfill those wants.Trade-off, p. 9. The idea that, because of scarcity, producing more of one good or service means producing less of another good or service.Voluntary exchange, p. 11. A situation that occurs in markets when both the buyer and the seller of a product are made better off by the transaction.Chapter Outline Why Does Ford Assemble Cars in Both the United States and Mexico?U.S. firms, such as the Ford Motor Company, have produced goods in other countries for many years.Recently, Ford’s non-U.S. operations were a controversial subject. In an attempt to increase manufacturing employment in the United States, in 2017, President Trump considered imposing a 35 percent tariff on cars that Ford and other U.S. companies assembled in Mexico for sale in the United States. The tariff would increase prices and reduce car sales. Companies assemble cars in Mexico because in the market system allows firms respond to economic incentives. The costs of wages and parts in Mexico are low enough to allow Ford to produce a car for $1,000 less than the cost of producing a car in the U.S. Firms also respond to changes in consumer tastes and government policies. In 1994, the North American Free Trade Agreement (NAFTA) made it easier for Ford and other firms to ship products from Mexico to the United States. In 2017, some policymakers considered imposing tariffs to reverse the economic incentives in NAFTA.

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CHAPTER 1 | Economics: Foundations and Models 3

Teaching Tips

There are special features in the textbook:

• The introduction, or chapter opener, uses a real-world business example to preview the economic

issues discussed in the chapter.

• At the end of each of the first four textbook chapters is a feature titled An Inside Look that consists of

a recent news article plus analysis and questions. The article links back to a topic discussed in the chapter opener. Visit www.myeconlab.com for additional current An Inside Look news articles.

• A boxed feature titled Economics in Your Life & Career complements the business example that opens

the chapter. Economics in Your Life and Career poses questions that help students make a personal connection with the chapter theme. At the end of the chapter, the authors use the concepts described in the chapter to answer these questions. Extra Economics in Your Life & Career features are included in the Instructor’s Manuals.

• Don’t Let This Happen to You is a box feature that alerts students to common pitfalls covered in that

chapter.

• There are between two and four Analyze the Concept features in each chapter that provide real-world

reinforcement of key concepts by citing news stories that focus on business and policy issues. Extra Analyze the Concept features appear in the Instructor’s Manual.

• Solved Problems use a step-by-step process for solving economic problems related to a chapter

learning objective. Extra Solved Problems are included in the Instructor’s Manual.

• Real-Time Data Exercises (RTDA) are included with problems at the end of macroeconomics chapters.

These problems refer to data and graphs that students will find at the web site of the Federal Reserve Bank of St. Louis (FRED). Many RTDA require more elaborate calculations than other problems and the use of Excel spreadsheets.You can use these features as the basis for classroom discussion, homework assignments, and examination questions.People must make choices as they try to attain their goals. The choices people make represent the trade- offs made necessary by scarcity. Scarcity is a situation in which unlimited wants exceed the limited resources available to fulfill those wants. Economics is the study of the choices people make to attain their goals, given their scarce resources. An economic model is a simplified version of reality used to analyze real-world economic situations.Teaching Tips Students will better understand what scarcity means if given examples of things that are not scarce.Suggest examples of “free” resources—sand on a beach, fresh air, etc.—and ask your students to contribute their own examples; they will soon realize that the list of free resources is much shorter than the list of scarce resources.

1.1 Three Key Economic Ideas (pages 4–8) Learning Objective: Explain these three key economic ideas: People are rational, people respond to economic incentives, and optimal decisions are made at the margin.A market is a group of buyers and sellers of a good or service and the institution or arrangement by which they come together to trade.

• People Are Rational

Rational individuals weigh the benefits and costs of each action, and choose an action if the benefits outweigh the costs..

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