1. Most of Chapter 1 will have been covered in the basic principles course. This would be a good time to cover some of the subtler points, or to review topics that may not be completely understood.
2. Teachers of economics are luckier than those in other fields, in that they have a single unifying theme that they can properly say the subject is "all about" -- the Invisible Hand. Once the student has a firm grasp of this concept everything else will fall into place. However, a direct unrelieved theoretical presentation of the concept may leave students asking "so what?" -- if they have grasped the idea at all. The best approach is to weave in a generous dose of real-world applications, along the lines of those given in the text. Especially useful are discussions of day-to-day economic problem such as the effects of price controls, unions, taxes, environmental regulations, import quotas, etc.
3. It may be worth clarifying what the assumption of rationality means in economics, and its importance in predicting behavior. Students who jump to the conclusion that rationality requires a logical decision-making processes might be directed to Example 1.3. Examples 1.4, and 1.5 are useful in this regard.
4. Students will inevitably forget which is which in learning the distinction between positive and normative analysis. Unfortunately, the nomenclature is not very illuminating, but the idea is an important one, as Example 1.11 points out.
5. In order to get the student off to a good start, the discussion of the scientific usefulness of economics should not be down-played. Without too much over-selling we can claim that in practical terms economics often compares favorably with other pragmatic sciences such as engineering and medicine. The "Ecologist, the Economist, and the Statistician" example elaborates this important point. Of course, with sophisticated students the instructor might well devote some attention to the limitations of economics.
6. An important final section discusses the two general techniques of economics -- optimization and equilibrium. It is amazing how much mileage we can get out of only two underlying concepts, and this should be pointed out to students. They will go far if only they thoroughly understand just these two analytical techniques, and can distinguish between an optimization problem and an equilibrium problem. Much confusion can be avoided if the instructor always refers to decisions of individuals or firms (economic agents) as "optimizing" choices, and reserves the term "equilibrium" to describe the workings of markets.
1. A good deal of this chapter will have been covered in a strong principles course. As regards supply-demand analysis, you should make sure that all students know the difference between a change in demand (shift of the demand curve) and a change in amount demanded (movement along the demand curve) before you proceed to more advanced material.
2. A good review of simultaneous equations will be useful. Even though most students will already have learned the technique, they may not recall how to actually use it. For example, most students would be lost in computing the effect of a tax on transactions, but the condition P+ = P¯ + T makes it simply a question of adding another equation to the system.
3. Spend a good deal of time on the relations between total, average, and marginal magnitudes. The graphical relations should become second nature for students.
4. Students will all too commonly mix up variables, differentiate with respect to P instead of Q, or sum vertically when they thought they were summing horizontally.
5. As will be the case throughout, instructors with suitably prepared students should make use of the optional starred sections and the mathematical footnotes. The calculus techniques employed in the latter are usually at the first-year level, though in later chapters second-year techniques such as partial differentiation are sometimes used.
1. The best single classroom aid for this topic is a visual illustration of a utility hill. This will make the properties of indifference curves seem much more sensible.
2. When studying cardinal and ordinal magnitudes, students will often forget which is which.
3. The shapes of indifference curves for various combinations of goods, bads, and neuters is an important topic, and is a useful test of understanding.
4. It is important to stress whether each indifference curve characteristic can be derived logically or is based upon empirical observations.
5. The device of indicating preference directions on indifference curve maps will be found to be helpful.
1. The distinction between income and substitution effects is intrinsically difficult, and often misunderstood by students. As it will be coming up often in the book, a particularly patient presentation will be well worth the effort.
2. Horizontal summation of demand and supply curves is not intrinsically difficult, but seems often to confuse students.
3. Students will seldom grasp the relations between the PEP and the demand curve, and the IEP and the Engel curve, without considerable guidance. Graphical presentations, such as the derivation of the demand curve from the PEP, are helpful in this respect. Also, it should be emphasized that all of the above curves are variations of the consumer's optimum -- the only difference being in the parameters chosen to be varied.
4. In more advanced treatments, a lot of confusion can be avoided by explaining the shapes indifference curves take on when dealing with normal vs. inferior goods. For example, if the goods are normal, the indifference curves become steeper as we move upward.
5. The analysis of the consumer's optimum in Chapter 4 is a standard portion of any intermediate price theory course, but it is also one of the most difficult. Particular attention is also warranted as it is the model instance of the more general class of optimization problems that the student will be encountering. The double development (graphical and mathematical), and the subsidy-voucher applications at the end of the chapter, are intended to provide the student ample opportunity to learn the subject matter.
1. Elasticity, which is fundamental to this chapter, does not come easily to many students. Various definitions of elasticity are useful for different problems, but the most easily understood form seems to be the percentage change in one (dependent) variable over the percentage change in another (independent) variable:
2. The concept of a Giffen good tends perhaps to receive excessive attention. It has some value for illustrating the underlying theory, but its practical significance is negligible.
3. The compensated demand curve is easily understood, particularly the Hicks decomposition, but students typically find the Slutsky decomposition hard to grasp, and its utility on the intermediate level is questionable. An instructor should avoid stressing this topic if he is less than confident of his students' abilities.
4. In contrast, the topic of rationing is not very difficult, and extremely useful for deepening the student's understanding. The additional realism gained by covering this topic may make it well worth the time spent in lecture. (The instructor should note, however, that the text treatment of "Time as a Constraint" is at a higher level of difficulty.) For more advanced classes, multiple constraints lead quite naturally into the topic of linear programming (not covered in this text).
1. After the introductory discussion, the student has by now been exposed to the topics of consumption and demand. In this chapter the emphasis shifts to production and supply. Also, the economic units of major interest now become the firm and the industry. It is important to make this transition clear to students.
2. Students often fall into the trap of interpreting the short-run and long-run as time periods only, rather than decision horizons in which different levels of choice are possible. Establishing the distinction in terms of options rather than time may help them avoid confusion.
3. The discussion of short-run and long-run, and particularly the graphical relations, will create problems for students, but is quite essential for them to grasp.
1. There will always be someone who cannot understand why the supply curve of a competitive firm is the MC curve. Not that the concept is hard -- you just have to repeat it a few times.
2. Externalities will be completely new to many students. In view of the importance of the topic, a fairly thorough class presentation is warranted.
3. The zero-profit theorem, and the related concept of economic profit, will be great aid in getting across the idea of the Invisible Hand. This might be put in terms of a seeming paradox: How can it be that the universal attempt to maximize profits leads to an outcome with zero profits?
4. Consumer Surplus and Producer Surplus should be well covered in class. Classroom examples can include discussions of the costs and benefits of (among other things) price controls, agricultural price supports, taxes, tariffs, subsidies, rationing, and minimum wages.
1. By now, students should be able to explain in their sleep why MC = MR.
2. Since it is a rather new topic to most students, the efficiency loss due to monopoly and regulation should be explained carefully.
3. Market Segmentation is easily understood at the basic level, but the explanation involving elasticities of demand should be explained carefully. We recommend use of the formula:
4. The section on multi-part pricing can normally be safely left to the reading.
1. The material in this chapter is not very difficult; moderately able classes should be able to cope with it, if time is available.
2. Of the topics in the chapter, the one most commonly covered in textbooks is monopolistic competition. Product differentiation is essential to monopolistic competition, but product differentiation arises in other market structures as well -- for example in pure monopoly. To treat product differentiation only in the context of monopolistic competition is seriously misleading. In the text here, the monopolistic-competition solution is developed from the monopoly solution for product differentiation, by the device of imagining that the separate productive plants of a monopolist become independent firms.
3. The locational analog is a natural one for handling product differentiation, but should be explained clearly to students. While the linear location metaphor for product differentiation is more familiar, the circular or ring metaphor introduced here leads to much neater results.
4. The topic of quality equilibrium, and the special application to suppression of inventions, is of considerable interest to students.
1. The idea of a Reaction Curve will be novel to most students. As this is a new departure in terms of analytic techniques, it is suggested that you start from basic principles and proceed slowly.
2. The kinked demand curve is useful in developing understanding of the Marginal Cost/Marginal Revenue curves. It may also be of interest to discuss the controversy over the practical value of this theory.
3. The theory of games is often introduced to students in terms of the "zero-sum" case. This case is of no interest in economics, as it is a situation of pure conflict without potential mutual advantage from exchange or agreement. While the instructor may want to discuss the zero-sum case for background, we have found it better to proceed directly to the case of economic interest -- typified by the "Prisoner's Dilemma."
1. This chapter introduces several concepts that students will discover have interesting applications in the real world and in their own experience. Discussing these applications, perhaps using the text’s examples, will keep things lively.
2. The foundations for much of the analysis have been laid in previous chapters. It will probably be helpful to emphasize those connections. In particular, the chapter uses applications of utility theory and consumer choice (chapters 3 and 4), as well as game theory and public goods (chapter 10).
3. Probabilities play a greater role in this chapter than perhaps any other, although the level of complexity is kept low. Students who have poor preparation may need a little review.
4. The analysis of the “lemons problem” may create some confusion if it is not explained carefully, as some students may be confused by “the demand curve that slopes up” in Figure 11.4. It may help to remind them that a good’s attributes are held constant when a demand curve is drawn, but a different curve is needed to analyze the effect when attributes can change.
1. This Core chapter will require more than most in class time, as it covers a good deal of material.
2. The Factor Employment Condition, mrpa = mfca, is most easily explained by graphs. Algebraic development, beyond that already provided in the text, should be used for strong classes only.
3. The demand for a factor, by the firm and the industry, is unfortunately rather complex. Students will normally require a particularly careful explanation.
4. It is important, under the monopsony model of minimum wages, to explain why the effective mfc has a horizontal range at the level of the minimum wage and then jumps to rejoin the original mfc curve.
1. The leisure/income graph is an important application of preference theory generally and indifference curves in particular. It may be necessary to briefly review some of the relevant material in Chapters 3 and 4.
2. Students sometimes have difficulty grasping the idea that leisure is a "good," and this may require some explanation.
3. The relation between Producer Surplus and economic rent is a subtle point, but rather important. You may want to consider giving it a little more time in lecture.
1. This chapter is one of the most crucial of the book. In it, the topic of market equilibrium is systematically treated for the first time, apart from the preliminary discussion in Chapter 2.
2. As most of us remember from our own days as an intermediate student, the Edgeworth box may be hard to get used to. Considerable patience should be exercised in explaining the principles involved.
3. It is easy to confuse exchange with production. One of the more common errors is to inadvertently say something that applies only where production can take place, when you are actually talking about pure exchange. Much confusion can be avoided if you stress the fact that exchange is simply a reshuffling of a fixed quantity of goods, while production always involves a change in the physical quantities (social totals) of goods.
4. This section on transaction costs of the lump-sum variety is a difficult portion of the chapter.
5. A very nice exercise for superior students is to explain why lump-sum transaction costs lead to minimum transaction quantities (transaction supply and demand curves that begin some distance away from the vertical axis).
6. The topic of money is particularly interesting because it constitutes a bridge to macroeconomics.
1. The topic of intertemporal choice is often puzzling to students because of the special language used: interest, investment, time-preference, saving, etc. It is reassuring for students to know that, apart from the special terminology, they do not have to learn a new subject matter to deal with intertemporal problems. The standard price-theory techniques of individual optimization and market equilibrium are completely valid and applicable in the realm of intertemporal choice. Indeed, this is one area where practical businessmen and government decisionmakers are aware of the relevance of economic analysis.
?2. The concept of Present Value comes easily to most students. A real test of their understanding is to see if they can handle changing interest rates.
3. The graphical interpretation of saving, borrowing, investment, and lending will not be understood after just one pass. Making the connection with the discussion in Chapter 14 (full versus transaction demand and supply, etc.) will do much to help understanding.
1. In the discussion of general equilibrium, and especially when explaining the various conditions for efficiency, a diagram showing the social PPC and an inscribed Edgeworth box is often helpful.
2. The section entitled "What Can Go Wrong? Almost Everything." is very useful for deepening the student's understanding of the operation of the Invisible Hand. References to the Coase theorem, with due regard for real-world applicability, are also helpful.
3. When discussing public goods, the concept of vertical summation of demand curves needs careful attention. Students will be familiar with the technique from Chapter 4, but the logic behind it is somewhat less than obvious.
4. Students are often inclined to consider the Problem of Equality as a violation of the laws of economics. Much confusion can be avoided if you stress the fact that equality can be thought of as a special kind of public good, which arises because of man's tendency to be benevolent to those less fortunate than himself, and jealous of those who are more fortunate.
This chapter makes for both easy reading and interesting classroom discussion. Coverage of this exciting new extension of economic analysis will go far towards deepening the students' interests in economics.
Copyright 2005 Cambridge University Press
Website design and some content produced by Ray Bromley