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Economics Today, 17th Edition contains two features called Issues and Applications and You Are There that present current issues and have accompanying. Full file at anesi.info Miller-Test-Bank Economics Today, 17e (Miller) Chapter 2 Scarcity and the World . Economics Today: The Macro View 18th Edition Pdf Download For Free Book - By Roger. LeRoy Miller Economics Today: The Macro View For.

B venture capital. An acre of land yields bushels of beans or bushels of wheat. B the satisfaction of one person's want means another person will be more than satisfied. B the curve will move to the left. Jane just ordered a car only to be told that she will have to wait three weeks for it to be delivered. Log In Sign Up. C refers to the process of raising funds through the stock market.

D sunk cost. B is always the value of the next best forgone opportunity. C does not exist since there are no receipts. D is always the lowest valued alternative. Previous Edition 4 Opportunity cost is defined as A the value of the next-best alternative that must be sacrificed to attain a want. B the least-costly means to produce output. C the value of the output currently received by an individual or a corporation. D the return from a given unit of labor.

Previous Edition 5 One opportunity cost associated with going to college is A purchasing text books. B paying tuition. C giving up employment possibilities while in college. D paying for room, board, and other living expenses. Previous Edition 7 Fred and Ann both decide to see the same movie when they are given free movie tickets.

We know that A both bear an opportunity cost since they could have done other things instead of see the movie. B both bear the same opportunity cost since they are doing the same thing. C the cost of going to the movie is greater for the one who had more choices to do other things.

D neither bears an opportunity cost because the tickets were free. Previous Edition 8 Opportunity cost is A the intrinsic value of an economic good. B the total value of all the alternatives given up when a choice is made. C the value of the opportunity selected when a need is satisfied. D the value of the next highest ranked alternative that must be sacrificed to obtain a want.

You choose to go to a movie. The opportunity cost of the movie is A the value of the book not read. B the value of the television program not watched. C the value of the concert that you didn't attend. D the value of the activity that you would have selected if you hadn't gone to the movie. Previous Edition 10 For every choice a person makes it can be assumed that A the chooser has full knowledge of the situation.

B some opportunity cost was involved. C there is a fifty-fifty chance the choice was the wrong one. D a good is involved and satisfaction is gained. Previous Edition 11 The opportunity cost of going to college for a student receiving a scholarship A is the income that she would have earned if she did not go to college.

Economics Today, 17th Edition

B is the risk of dropping out. C is the food and living expenses that she has to purchase while in college. D is zero because she does not have to pay tuition.

B goods have different prices. C of shortages. D the value of services is hard to determine. Previous Edition 13 Opportunity cost is A the cost of producing all goods and services in the United States. B the value of the next-best alternative that must be sacrificed to satisfy a want. C the fixed cost of production.

D the value of the most useful alternative that must be sacrificed to obtain something or satisfy a want. A Cost is always foregone opportunity. B Opportunity cost is the next best alternative. C John wants a burger and fries. The concept of opportunity cost applies even though he has enough funds to buy both. D Opportunity cost exists only for goods with monetary values. B the same thing as the money price of a good. C the value of the next best alternative which was given up.

D based on the intrinsic value of the good itself. Previous Edition 16 Steve and Karen decide to attend the same concert when they are each given free tickets to it.

We know that A both bear the same opportunity cost because they are seeing the same thing. B both bear the same opportunity cost because the tickets have the same face value. C both bear an opportunity cost that depends on what each person is giving up to attend the concert. D neither bears an opportunity cost since the tickets were given free to them. Previous Edition 17 Samia has decided that with the two hours in between classes she can do one of 3 things.

She has ranked her choices, from highest to lowest as, 1 chat with her friends, 2 study economics or 3 take a nap. The opportunity cost of chatting with her friends is A the combined value of studying economics and taking a nap. B the value of studying economics, the next best use of time. C the value of chatting with her friends.

D zero since she does not pay her friends to talk to her. She has ranked her choices, from highest to lowest as, 1 turkey sandwich, 2 tuna sandwich, 3 slice of cheese pizza, 4 cheeseburger.

The opportunity cost of the eating turkey sandwich is A the combined value of the tuna sandwich, slice of cheese pizza and cheeseburger. B the value of tuna sandwich, the next best choice. C the value of the cheeseburger. D zero since she has satisfied a want. Previous Edition 19 Which of the following is a true statement? A Cost is always measured in the nation's currency.

B Opportunity cost is an objective measure since the cost of an activity is the same for everyone. C The less alternatives there are the greater the cost. D Opportunity cost is always a foregone opportunity. Previous Edition 20 Opportunity cost exists because A of scarcity. B prices must adjust to eliminate shortages.

C production could not occur without the opportunity cost of using resources. D the value of economic goods is positive while the value of goods is zero. B value of all the alternatives not chosen. C cost of making the wrong choice. D cost incurred by others who are unhappy with your decision. Previous Edition 22 The saying that "You cannot have your cake and eat it too" illustrates the economic concept of A a positive statement.

B a normative statement. D opportunity cost. Previous Edition 23 On an afternoon that a class meets, you could alternatively study for an exam that will take place in another class the next morning, go to a movie with a friend, or, most desirable to you at present, take a nap.

The opportunity cost of attending the afternoon class is A forgoing the nap. B missing seeing the movie with your friend. C giving up the time to study for the next morning's exam. D being unable to engage in all three of the above activities. B the cost of producing the purchased goods. C the next highest valued alternative when a choice is made.

D the dollar price of the purchased item. Previous Edition 25 You have the option of consuming one cup of coffee or two donuts or three oranges. You picked the cup of coffee. Therefore the opportunity cost of this cup of coffee is A the price of the cup of coffee. B the difference in the prices of these three products. C the price of the donuts as they are usually consumed with coffee. D either the donuts or the oranges, whichever you like more. Previous Edition 26 The opportunity cost of going to college full time away from home is A the income you could have earned from a full-time job.

B the funds you would have saved if you had not paid the tuition. C the time you could have spent with friends back home. The night before an economics exam, the student has set aside four hours to study for the exam, estimating that for each hour spent studying, her grade will rise by 5 points.

The next day she takes the test and gets a grade of B the 15 extra points she estimates that she could have earned on the exam if she had studied the extra three hours. C the three hours she did not study. D the entire four hours she set aside for studying. Previous Edition 28 Opportunity cost can best be defined as A the interest cost of financing a business loan at the bank. B the value of all of the alternatives sacrificed. C the value of the next-highest-ranked alternative.

D There is no real definition for opportunity cost. B the cost of gasoline used to get to the beach. C the travel time to the beach. C greed. D self-interest. Previous Edition 31 You like to sleep until What is the opportunity cost of attending an 8: A nothing, since you can go back to bed later B sleep C obtaining the notes from the 8: Previous Edition 32 Opportunity costs arise from A choices.

B taxes. C mistakes. D regrets. B the inability of candidates to differentiate themselves from one another. C the inability of the typical voter to change the election outcome by voting. D the confusion generated by the voting machines.

Previous Edition 34 Which of the following sets of terms describes the problem of scarcity in economics? A Goods, land, and needs B Labor, needs, and opportunity costs C Choices, opportunity costs, and trade-offs D Production, consumption, and wants Answer: Previous Edition 35 Briefly explain why people make choices.

People make choices because of scarcity. Scarcity exists because resources are insufficient to satisfy people's every desire. What is the opportunity cost of attending college?

The opportunity cost of an action is the value of the next best alternative that a person has to give up when making a choice. The opportunity cost of attending college is what the college student would give up by going to school, such as the income she could have earned if she did not go to school. Previous Edition 37 How are scarcity, choice, and opportunity cost related?

Since resources are scarce, we cannot have everything we want. This implies that we must make choices. We can't have everything we want, but we can have some of the things we want, and must choose. But when we choose one thing, we're prevented from choosing one or more other things. The highest-valued alternative good that we don't choose is the opportunity cost of the good we did select.

Previous Edition 38 Suppose that nuclear power plants are banned. What are examples of the opportunity costs of this decision? Electricity must be produced by some method, so if there are fewer nuclear plants, there will be more plants that use fossil fuels. There will be an increase in coal mining and petroleum production.

Coal mining is hazardous and will increase the number of injuries and deaths, and the increased use of oil may generate more oil spills.

The opportunity cost of the pizza and soda is what you would give up by consuming these things, such an alternative food choice like a hamburger and a bottle of water could have consumed if you did not consume the pizza and soda. Previous Edition 40 It is not uncommon for people to say something like, "If we can put someone on the moon we should be able to.

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What response can an economist make to this person? Society must make choices, and when it chooses one thing, it must give up something else.

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Resources were used to get people to the moon, and these resources are not available to do other useful things. The fact that we put someone on the moon means that there are some other things we cannot do. Who has a higher opportunity cost? The opportunity cost is the income lost while going to graduate school.

An NBA basketball player typically earns much more than does a fast-food cook so that the opportunity cost of going to graduate school is likely to be higher for the NBA basketball player than for the fast-food cook.

B 50 guitars. C guitars. D 25 guitars. Previous Edition 2 In the above figure, the opportunity cost of moving from producing 50 guitars and 50 ukuleles to producing 25 guitars and 75 ukuleles is A 25 guitars. B 75 ukuleles. C 25 ukuleles. D 50 guitars. B increasing.

C constant. D zero. Previous Edition 4 In the above figure, moving from producing 50 guitars and 50 ukuleles to producing 25 guitars and 75 ukuleles, the opportunity cost of one ukulele is A 25 guitars.

D 1 guitar. Previous Edition 5 In the above figure, the opportunity cost of moving from producing 75 guitars and 25 ukuleles to producing 25 guitars and 75 ukuleles is A 25 guitars. B shift to the right of the curve.

C shift to the left of the curve. D movement along the curve. Previous Edition 7 A farmer has acres of land on which he can grow soybeans or corn. An acre of land yields bushels of soybeans or bushels of corn. The above figure refers to the farmer's A production possibilities curve. B substitution options curve. C demand curve. D opportunity cost curve. A 10, B 2, C 1, D 0 Answer: Previous Edition 9 In the above figure, what is the opportunity cost of one bushel of soybeans?

A 1 bushel of corn B 0. Previous Edition 10 In the above figure, what is the opportunity cost of one bushel of corn?

A 1 bushel of soybeans B 0. B the production possibilities curve bows outward. C the production possibilities curve is a negatively sloped straight line. D factors of production must not be fully employed. Previous Edition 12 The production possibilities curve represents the maximum feasible production combinations resulting from A the mix of current resources that utilizes all available inputs using current technology.

B a fixed amount of demand by consumers. C the lack of trade-offs in production. D the lack of technology used in production. Previous Edition 13 The production possibilities curve represents A the maximum amount of labor and capital available to society. B the combinations of goods and services among which consumers are indifferent. C the maximum combination of goods and services that can be produced with fixed resources and technology, given efficient use of the resources.

D the maximum rate of growth of capital and labor in a country. Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions Question Status: B be bowed in. C be a straight line. D not exist. Previous Edition 15 A straight-line production possibilities curve takes this shape because A the opportunity cost of producing a good is constant.

B the opportunity cost of producing more of a good is decreasing. C resources are better suited for producing one output than another. D resources are fixed. Previous Edition The above table shows the daily production possibilities for a bakery.

Currently the bakery bakes 60 pizzas and loaves of bread, that is-it is at alternative C. Previous Edition 18 Using the above table, moving from alternative C to alternative B, what is the opportunity cost of one loaf of bread? A 1 pizza pie B 30 pizza pies C 2 pizza pies D 0. Previous Edition 19 Using the above table but now the bakery bakes 30 pizzas and loaves of bread alternative B , moving from alternative B to alternative D, what is the opportunity cost of one pizza pie?

B they buy goods with money. C trading takes place in a market economy. D they can make themselves better off through trade. Previous Edition 21 Which of the following statements indicates the idea of trade-offs? A "I chose the road less traveled. Previous Edition 22 The production possibilities curve represents A the total amount of stocks and bonds that exist in the economy.

B the trade-off between human capital and physical capital that exists. C all possible combinations of total output that can be produced. D society's needs. B the resource allocation curve. C the efficiency curve. D the supply curve. Previous Edition 24 Refer to the above figure. A farmer has 50 acres of land on which to grow wheat or beans.

An acre of land yields bushels of beans or bushels of wheat. Which of the following is a possible combination of beans and wheat that can be grown, assuming the land is farmed efficiently? A 30, bushels of each B 20, bushels of beans and 40, bushels of wheat C 5, bushels of beans and 5, bushels of wheat D 16, bushels of beans and 8, bushels of wheat Answer: A 30, bushels of each B 15, bushels of beans and 10, bushels of wheat C 25, bushels of beans and 25, bushels of wheat D 20, bushels of beans and 40, bushels of wheat Answer: Previous Edition 26 In the above figure, the farmer faces a trade-off between beans and wheat equal to A one-to-one.

B three-to-one. C one-to-two. D one-to-four. Previous Edition 27 The above figure is referred to as a n A trade-off curve. B opportunity curve.

C production possibilities curve. D scarcity-shortage curve. If the farmer has 50 acres of land, the farmer is producing at point a, and an acre of land yields bushels of beans or bushels of wheat, how much land is devoted to the production of wheat? Previous Edition 29 The production possibilities curve demonstrate which of the following concepts? A scarcity B choice C trade-offs D all of the above Answer: Previous Edition 30 The production possibilities curve shows all possible combinations of A two goods that are desired by society.

B two goods that can be efficiently produced with a given set of resources. C two goods that can be purchased given the prices of the goods. D two goods that two countries can trade with each other. B a decreasing opportunity cost between the two goods. C a constant opportunity cost between the two goods.

D no opportunity cost between the two goods. Previous Edition 32 Which of the following would result in a movement along the production possibilities curve? A A fall in the unemployment rate B Growth in the capital stock C Population growth D A change in the outputs of two goods that a society chooses to produce Answer: Previous Edition 33 A movement along the production possibilities curve would imply that A the labor force has grown. B productivity has increased.

C society has chosen a different set of outputs. D productivity has declined because workers are demanding more leisure. A An additional computer can be produced only if fewer televisions are produced. B The trade-off between computers and televisions is not constant. C Society cannot have more of both goods at the same time.

D There are no opportunity costs involved in choosing one point on the curve over all other points. Previous Edition 35 If the production possibilities curve is a downward sloping straight line, then A resources are highly specialized, making it difficult to use them for alternative uses. B technological change has increased. C production is efficient only when producing at the mid-point. D all resources must be perfectly adaptable for alternative uses.

B a production possibilities curve. C a bell curve. D a supply curve. Previous Edition 37 Suppose an acre of land yields bushels of corn and that one bushel of corn provides enough seed for one-quarter of an acre of land. The opportunity cost of consuming another bushels of corn today is A bushels of corn next year. B 25 bushels of corn next year. C 10 bushels of corn next year. Previous Edition 38 What does the slope of the production possibilities curve represent? It represents the trade-off between two goods from two points on the PPC.

Specifically, as we move from one point to another, in order to produce more of one good, we must trade-off or give up the other good. A production possibilities curve shows the combinations of maximum outputs that can be produced with a fixed amount of resources. Previous Edition 40 How can the concepts of opportunity costs, scarcity and choice by illustrated by the production possibilities curve? The concept of opportunity cost is illustrated by movements along the production possibilities curve, meaning that producing more of one good necessarily means less production of another good.

B the farmer is using his land to produce a crop other than soybeans or corn. C the farmer must be using more land than was used in constructing the production possibilities curve. D the farmer is using his resources efficiently. Previous Edition 3 Which of the following would NOT allow society to move to point "h" in the above figure? A An improvement in technology B More efficient use of current resources C An increase in quantity of labor D An increase in quantity of capital Answer: B production of both corn and cloth is characterized by increasing costs.

C production of both corn and cloth is characterized by constant costs. D production of corn is characterized by constant costs and the production of cloth is characterized by increasing costs. Previous Edition 5 Between points "b" and "c" in the above figure, the opportunity cost of more bushels of corn is A yards of cloth. B yards of cloth. C yards of cloth.

D yards of cloth. Previous Edition 6 If an economy is operating at a point inside the production possibilities curve, then A society's resources are being inefficiently utilized.

B the curve will move to the left. C society's resources are being used to produce too many consumer goods. D economic policy must implemented to slow growth of the economy further. B total efficiency in industry. C a new resource being discovered. D a lack of modern products being produced. Previous Edition 8 The production possibilities curve bows out because A production is efficient. B of the law of increasing additional cost. C production is inefficient. D resources are not being fully utilized.

Previous Edition 9 When deriving the production possibilities curve, it is assumed that A the amount of each good that is to be produced is fixed. B the prices of resources are fixed along the curve. C most resources can be used to produce only one good. D resources are efficiently used. B inefficiency in production.

C the law of increasing relative cost. D the law of decreasing relative cost. Previous Edition 11 Refer to the above figure. If the farmer is growing 8, bushels of beans and 8, bushels of wheat, then we know that A the farmer is not using resources efficiently. B the farmer is using more land for wheat than for beans. C the farmer should increase the amount of wheat grown and reduce the amount of beans. D the farmer cannot be using the amount of land that was used to construct the curve.

If the farmer is producing 4, bushels of beans and 38, bushels of wheat, then we know the farmer A is using resources efficiently. B is producing too much wheat. C is inefficient because point a is the most efficient point on the curve. D must be using more resources than were assumed available in constructing the graph. Previous Edition 13 How does an economy represented by a straight-line production possibilities curve differ from one represented by a traditional production possibilities curve with a bowed shape?

A In the economy represented by a straight-line production possibilities curve, there is no opportunity cost. B In the economy represented by a straight-line production possibilities curve, neither good is scarce. C In the economy represented by a straight-line production possibilities curve, the law of increasing relative cost does not apply. D In the economy represented by a straight-line production possibilities curve, changing the amount of resources devoted to the production of each good will not alter the amount of each good actually produced.

The table shows the maximum combination of smartphones and tablets of corn that can be produced, when all resources are fully employed. B the opportunity cost of producing 30 instead of 20 smartphones is tablets. C the opportunity cost of producing 40 instead of 30 smartphones is 30 tablets. D the opportunity cost of producing 90 instead of 50 tablets is 50 smartphones.

B that the trade-off between the 2 goods is not constant.

C changing technology. D only 1 good is always being produced. B indicates unemployment. C is currently not attainable. D can never be reached, even in future periods. A an upward movement along the production possibilities curve B an outward shift of the production possibilities curve C an inward shift of the production possibilities curve D a downward movement along the production possibilities curve Answer: Previous Edition 18 One of the assumptions underlying the production possibilities curve is that A at least one of the factors of production is a free good.

B the quantity of the resources available for the production of economic goods is fixed over a given time period. C there is at least one factor of production that is employed inefficiently. D some of the factors of production are not being used.

Previous Edition 19 Which of the following statements is NOT an assumption underlying the production possibilities curve? A Resources are fully and efficiently employed. B Technology is fixed.

C Production occurs over some specified time period. D The amount of resources available for production can be changed quickly. A society cannot have an unlimited amount of each good. For an efficient society, an increase in clothing production will necessitate a decrease in food production.

A society will always produce the maximum amount of both clothing and food. Previous Edition 21 It is correct to state that a society which is on its production possibilities curve is A underutilizing is resources. B technologically inefficient. C consuming too much output. D fully utilizing its productive resources. Answers are at the end of the chapter, and more practice questions can be found in MyEconLab.

You Are There discusses real people making real personal and business decisions. Why Not? Some examples include: What If. The balance of Keynesian and Classical analysis gives instructors the flexibility to teach the models and schools of thought they want to include in their course.

Economic growth and development are covered conceptually in an early macro chapter, and then explored in more depth later, allowing an instructor the flexibility to deal with long-run topics both early on and later in the course. These slides provide multiple-choice questions for each chapter from the Test Banks. Visit MyEconLab to learn more, take a tour , and request access. Complete integration between the book and MyEconLab: Each new student copy comes with prepaid access to a MyEconLab course developed specifically to accompany this text.

End-of-chapter questions are available within MyEconLab so students can make the most of their study time.

Learning through practice: For each chapter, students can self-study using the preloaded sample tests and tutorial resources, or they can complete instructor-assigned problems. MyEconLab automatically grades exercises—even graphing problems—so students get instant feedback and personalized Study Plans with links to additional learning tools.

Online instructor tools: Within MyEconLab, instructors can assign preloaded or customized multiple-choice, graphing, algorithmic, and free-response questions.

Exercises are auto-graded, and MyEconLab records the results in an online gradebook to effortlessly track student progress. Each video in this series presents an issue using ABC News footage accompanied by commentary from economists to show students the economics behind the news.

Visit Economics Videos for more information and to view a demo. New to This Edition. This new edition of Economics Today confronts leading-edge issues while lowering barriers to student learning. The text relentlessly pursues the fundamental objectives of showing students the centrality of economics in their own lives and providing students with many ways to evaluate their understanding of key concepts covered in each chapter.

These include: An appraisal of key questions raised by continuing growth of the U. An evaluation of a new aspect of Federal Reserve policymaking: Chapter 16 provides an analysis of various tools of credit policy that the Federal Reserve has adopted in recent years to supplement its traditional monetary policy instruments.

Coverage of two-sided markets: The discussion of network effects in Chapter 26 now includes consideration of oligopoly pricing complications that arise in markets in which intermediary platforms link groups of end users. An updated exposition of antitrust guidelines: Chapter 27 has been revised in light of recent changes in concentration measures and thresholds applied by authorities charged with enforcing U.

In the macro portion of the text, analyses have been added of the following: Chapter 7 considers the extent to which lengthening the duration of unemployment benefits from 26 weeks to 99 weeks may have contributed to a higher U. Chapter 11 explains why an index measure of financial market fear is often associated with short-term declines in total production of goods and services. Chapter 13 examines why most federal tax dollars recently transmitted to states to spend and thereby provide stimulus to the U.

Chapter 15 offers an explanation of why many banks no longer desire to expand deposits and indeed now actively seek to discourage customers from depositing more funds. The micro portion of the text now includes the following: Chapter 19 discusses why many rock musicians have been experienced declining revenues from sales of music recordings and concert tickets even though the prices of recordings and tickets have increased.

Chapter 24 examines the economic effects of a substantial expansion of occupational licensing requirements that many states impose on their citizens. Chapter 28 evaluates prospects for robotic apps to take away jobs from human beings.

Chapter 30 explains why the income gap between males and females has been shrinking and conceivably could eventually disappear. The Nature of Economics 2. Scarcity and the World of Trade-Offs 3. Demand and Supply 4. Extensions of Demand and Supply Analysis 5. Public Spending and Public Choice 6. The Rationality Assumption: The assumption that individuals will not intentionally make decisions that would leave them worse off. Responding to Incentives: An incentive is the reward for engaging in a given activity.

People react to an incentive by making a rough comparison of costs and benefits. A negative incentive raises the cost of doing something.

If benefits of a given choice do not change, then a higher cost negative incentive will decrease or perhaps eliminate a particular choice. Defining Self-Interest: The pursuit of goals that make the individual feel better off.

In economic analysis, these goals are often those which can be measured in monetary terms, although the pursuit of other goals such as prestige, love, or power can be analyzed using this concept.

Economics as a Science: Economics is a social science that utilizes the same types of methods used in biology, chemistry, and physics. Economic models or theories, which are simplified representations of the real world, are developed and used as aids in understanding, explaining, and predicting economic phenomena in the real world.

Models and Realism: A model should capture the essential relationships that are sufficient to analyze the specific problem or answer the specific question being asked. No economic model is complete in the sense of capturing every detail and relationship that exists in the real world.

A model is by definition an abstraction from reality. This does not mean that models are deficient simply because they are unrealistic and use simplified assumptions. Every model in every science requires simplification compared to the real world. Assumptions define the set of circumstances in which a model is most likely to be applicable.

Every model, therefore, must be based on a set of assumptions. Chapter 1 The Nature of Economics 3 1. The Ceteris Paribus Assumption: All Other Things Being Equal: The assumption that nothing changes except the factors being studied. It is used to isolate the effect of a change in one variable on another one by assuming that all other variables do not change.

Deciding on the Usefulness of a Model: A model is useful if it yields usable predictions supported by real-world observations. If a model makes a prediction and factual evidence supports the prediction, then the model is useful.

Thus economics is an empirical science; that is, it relies on real-world data in evaluating the usefulness of a model. Models of Behavior, Not Thought Processes: Models relate to the way people act in using limited resources and not to the way they think.

17th economics edition pdf today

Economists are interested in what people actually do, i. Behavioral Economics and Bounded Rationality: An approach to consumer behavior that emphasizes psychological limitations and complications that potentially interfere with rational decision making. Bounded Rationality: The idea that people are nearly, but not fully, rational so that they cannot examine every choice available to them but instead use simple rules of thumb to sort among the alternative available to them.

Rules of Thumb: A behavioral implication of bounded rationality is that people will use rules of thumb; that is, a simplified method of decision making. An important issue is that persons who appear to use rules of thumb may behave as if they are fully rational. Behavioral Economics: A Work in Progress: So far, proponents of behavioral economics have not conclusively demonstrated that paying closer attention to psychological thought processes can improve economic predictions.

Positive versus Normative Economics: Positive economics deals with what is. Normative economics deals with what some person thinks ought to be. Since positive economics predicts consequences of actions, it can be used to predict the effects of various policies to see if the policies aid in achieving desired goals.

Positive economics cannot provide criteria for choosing which outcomes or goals are preferable. Distinguishing Between Positive and Normative Economics: Positive economics is analysis that is strictly limited to making either purely descriptive statements or scientific predictions.

Normative economics is analysis involving value judgments about economic policies, a statement about what ought to be. A Warning: Recognize Normative Analysis: While it is easy to define positive economics, it is often difficult to identify unlabeled normative statements, even in a textbook. Wants have a special meaning in economics. Wants represent those things that people would buy if they had unlimited income.

In economics, we note that income is in fact limited, and thus, people must make choices. These choices are made on the basis of rational self-interest. This means that people make choices that, in their view, make them better off. People do not voluntarily make choices that they believe will make them worse off. This assumption of rational behavior underlies all economic decision making.

Emphasize that there are not enough resources to produce as much of everything that the citizens of any nation would want. Thus scarcity requires that choices be made as to which items and how many of each will be produced. Since resources are scarce, decisions about which and how many of each type of resource will be employed to produce those items are to be made. Again, compared to wants, resources are limited.

Scarcity also means in practice that everyone cannot have as much of everything that they would like to have. Thus some mechanism must exist to allocate what finally gets produced to the members of each nation. Economic Models Economic models are simplified representations of the real world. Economic models frequently present problems for students because they are so abstract.

The goal is for students to realize that only essential relationships are needed to deal with the problem at hand. A classic example of using an abstract theory is the decision of whether or not to take an umbrella when going outside.

If a person misses the weather report, the person can look outside at the sky. If the sky is overcast or if dark clouds can be seen in the distance, then a prudent person will carry an umbrella. A person reasons that clouds are often associated with rain.

If there are clouds of a certain type, then rain is likely but not certain. To actually know if rain will fall in a given place requires a complete knowledge of atmospheric conditions in a rather large area.

Even the weather service does not have this kind of information. The simplest theory that can predict is the one that should be used.

Prediction—The Test of a Theory A model is useful only if it predicts, i. It is not correct to fault a model because its assumptions are not realistic or because it is too abstract. The test of a theory is its ability to predict.

Economists cannot do controlled experiments the way chemists can. What is done instead is to look at evidence to see if the model can predict. Tests are usually done using statistical evidence and techniques. A great deal of economic research consists of empirical testing of theories. The Individual in Economic Analysis The unit of analysis is the individual. It is often difficult for students to distinguish between the individual as an abstraction and a given individual in the real world.

The difference between the two can be explained in the following way. The individual as an abstraction is a hypothetical typical individual or as psychologists would say a normal individual.

When we say that the individual is motivated by rational self-interest, this does not exclude the possibility that some persons may choose to not act in their own self-interest e. It only says that in most of our affairs, we choose to do those things that we believe will benefit us in some way and we choose not to do those things that we believe will make us worse off.

Economists have found that economic models work best when the individual is the unit of analysis because at the basis of every decision there are individuals making choices. Examples of these are as follows: Chapter 1 The Nature of Economics 5 1. Decreases in interest rates by the Federal Reserve are good because it stimulates the economy. Increases in interest rates by the Federal Reserve are bad because higher interest rates hurt low- income borrowers.

The best policy to get the economy out of a recession is to cut taxes. High gasoline prices are undesirable. It would be desirable to lower the prices of drugs to combat AIDS in poor countries. The increase in prescription drug prices is undesirable because many senior citizens must choose between their drugs and food. It is better to increase the progressive income tax than to increase a regressive sales tax.

Of the two methods of financing the war in Afghanistan, it is better to raise taxes on the American people rather than to borrow the money.

One of the more frustrating aspects of economic analysis is what appears to be the unrealistic assumptions of many economic models. For example, in the realm of macroeconomics, the rational expectations hypothesis in its pure form talks about workers not being fooled by expected changes in the money supply by the Federal Reserve.

It is true that most workers cannot tell you what the latest money supply growth rate figures are. However, workers do respond to what they perceive to be the expected state of the economy as it affects them. If the Fed is increasing the money supply at a faster rate and the inflation rate rises, workers will react as if they had a model of expected inflation.

It is their behavior that we measure and predict and not what they are thinking. If the assumption of economic rationality is correct, then they will not be systematically fooled.

One approach to explaining the same approach outside economics is to point out that it is highly unlikely that a champion pool player knows the laws of physics with regard to the exact force needed to hit the cue ball and the mathematical formulas needed to compute the exact angle to hit the pool table bank, but his behavior is the same as if he did. Political disturbances such as wars and threats of wars in the Middle East often lead to increases in the price of oil. You will often hear people say that the U.

Ask your students the difference between these statements. Obviously, the first is a positive statement. Generally, a political disturbance actually leads to reduced supplies or to fears of reduced supplies, or both. Price then rises. Whether or not oil prices should rise is a normative statement. Nothing scientific can be said about it because it is based on a value judgment.

It is worth examining the idea that changes in incentives cause people to change their behavior. For example, any decrease in costs tends to encourage an activity, ceteris paribus. What has happened to the use of texting versus calling as a method of communicating? Students report that texting has become the primary means of communication using cell phones with the number of text messages sent per month reaching into the thousands.