Chapter 01 - Economics and Economic Reasoning
1-1
CHAPTER ONE
ECONOMICS AND ECONOMIC REASONING
Learning Objectives
After you teach the material in this chapter, your students should be able to do the
following:
LO1. Define economics and identify its components.
LO2. Discuss various ways in which economists use economic reasoning.
LO3. Explain real-world events in terms of economic forces, social forces, and
political forces.
LO4. Explain how economic insights are developed and used.
LO5. Distinguish among positive economics, normative economics, and the art of
economics.
Teaching Objectives
To help your students achieve the Learning Objectives above, you should anticipate
common student difficulties with the material and be prepared to do the following:
 Defend the concept of scarcity. Many students might feel that the claim that
society has too few resources to satisfy all wants assumes that individuals are
materialistic or greedy. Think about approaching the constant evolution of our
wants and desires as a positive thing. (LO1)
 Link the concept of scarcity to the task of decision-making and coordination. If
our resources are too few to satisfy our wants, then there is a problem to be
solved: which wants will be satisfied and which ones won’t? This problem lies at
the heart of the three coordination problems covered in the chapter. (LO1 and
LO2)
 Defend marginal benefit and marginal cost analysis as the way that individuals
make decisions. Students may think at first that they are being taught a new trick
for decision-making. However, this is not the case. Explain to them that, whether
conscious or not, this type of analysis already underlies all decision-making.
(LO2)
 Connect the concept of opportunity cost with marginal benefit and marginal cost
analysis. Economists focus not only on the costs and benefits of choosing a
certain action, but also on the costs and benefits of choosing a certain action

Chapter 01 - Economics and Economic Reasoning
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rather than choosing another one. Mastery of this type of thinking will pay off for
your students throughout the entire course. (LO2)
 Provide examples of real life situations where economic forces (the instinct to
respond to scarcity) are allowed to work through market forces and other
situations where these forces are not (because of social forces or political forces).
(LO3)
 Introduce how economists develop models by referring to induction, deduction,
and abduction. This is also an opportunity to introduce the distinction between
theorems and precepts. These terms will be used throughout the text. (LO4)
 Delineate the three uses of economics discussed in this chapter: to understand the
economy (positive economics), to set goals for the economy (normative
economics), and to achieve those goals given how the economy functions (the art
of economics). (LO5)
For Professors New to Colander
Every book presents material in slightly different ways, so it is helpful to note some of the
names, notations, definitions, or symbols that Colander uses as compared to other books.
It will be easier for your students connect material presented in the lecture to material
covered in the text if you note the following:
 Colander emphasizes coordination in the definition of economics, and then ties
that into scarcity. “The three coordination problems” is how this textbook refers
to the fundamental “What? How? And for whom?” questions.
 The “invisible hand” focuses on “the price mechanism” and is presented as a
“market” force, which is an “economic force” that is allowed to operate through
the market. There are also social and political forces that interact with economic
forces to determine what market forces are allowed to operate.
 To keep any implicitly normative judgments out of the definition, “efficiency” is
defined as in terms of goals, not resources. Thus, efficiency is defined as
“achieving a goal as cheaply as possible” and not as “getting the most out of
available resources.”
 Colander uses Keynes' original tripartite division—positive, normative, and art of
economics—rather than the positive/normative distinction used by many books.
Policy discussions fall in the art of economics, and include both positive and
normative elements. Precepts belong in the art of economics; theorems belong in
positive economics.

Chapter 01 - Economics and Economic Reasoning
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Answers to the Problem Set
The following are the correct answers to the problem set that follows on the next two
pages, along with the learning objective associated with each question. The problem set
is designed to be photocopied directly from this book and distributed for student use.
1. (LO2)
a. Going to the concert does have a cost to you. The cost is the benefit you
would have received from another activity, or opportunity cost.
b. Since the tuition is nonrefundable, it is a sunk cost and therefore no longer
represents opportunity costs. The true opportunities costs of continuing to take
the course are the benefit of doing something else during class time.
c. Deciding not to make decisions is still a decision. The opportunity cost of not
considering choices is the benefit you would have gained from making those
choices.
d. How much you paid for the apples is a sunk cost, and therefore is not relevant.
2. (LO1)
a. Macroeconomics; b. Microeconomics; c. Macroeconomics;
d. Microeconomics
3. (LO5)
a. Positive; b. Normative; c. Normative; d. Positive; e. Art of economics;
f. Normative
4. (LO3)
a. True. Economic forces always operate.
b. True. Political forces, not market forces determine stamp prices.
c. False. Even though the government regulates this market, because the
medallions are sold at an auction, market forces determine their prices.

Chapter 01 - Economics and Economic Reasoning
1-4
ECONOMICS AND ECONOMIC REASONING
PROBLEM SET
NAME: _______________________________________ DATE: ____ / ____ / ____
Give the best answer to each of the following questions.
1. Briefly point out the faulty reasoning in each of the following situations:
a. You win a free, nontransferable ticket to a Sheryl Crow concert. Since the ticket is free
and it will therefore cost you nothing to go, you decide to go to the concert.
b. You paid nonrefundable tuition of $3,000 to take a 15-week course. Therefore, the
opportunity cost of attending class each week is $3,000 divided by 15, or $200.
c. You like to avoid costs; every decision involves opportunity cost. So you don’t make
decisions.
d. You have purchased 5 premium apples for $1.99 a pound, but when you get home, you
discover they are mushy. Since you paid top dollar for these apples, you decide you have
to eat them.
2. Classify the following Wall Street Journal articles as involving macroeconomic or
microeconomic issues based on their titles:
a. “Bernanke Sees Long Slog to Trim U.S. Trade Deficit”
b. “How Drugs for Rare Diseases Became Lifeline for Companies”
c. “Monetary Tightening Damps Brazil Investment”
d. “Debut of Chicken Little Gives Disney Something to Crow Over”

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Economics, 9th Edition Class Notes

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