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2.3 Supply
Syllabus terms Below you will fi nd all the terms appearing in the syllabus that are introduced in this chapter. They are listed below in alphabetical order. Note that these are all technical terms that students can be examined on. The defi nitions of all these terms can be found in the glossary of the coursebook.
Key terms
actual growth
See coursebook: Section 1.3
Adam Smith behavioral economics capital ceteris paribus change (key concept) choice (key concept) circular economy circular fl ow of income circular fl ow of income model distribution of income economic growth economic well-being (key concept) effi ciency (key concept) empirical evidence entrepreneurship equality equity (key concept) exports factors of production fi rms for whom to produce free good free market economy government intervention (key concept) growth in production possibilities households how to produce human capital hypothesis imports injections interdependence (key concept) Section 1.5 Section 1.5 Section 1.1 Section 1.4 Section 1.1 Section 1.1 Section 1.5 Section 1.3 Section 1.3 Section 1.2 Section 1.3 Section 1.1 Section 1.1 Section 1.4 Section 1.1 Section 1.4 Section 1.1 Section 1.3 Section 1.1 Section 1.3 Section 1.2 Section 1.1 Section 1.2 Section 1.2 Section 1.3 Section 1.3 Section 1.2 Section 1.1 Section 1.4 Section 1.3 Section 1.3 Section 1.1
Key terms See coursebook: • intervention (by the government; key concept) Section 1.1 • John Maynard Keynes Section 1.5 • Karl Marx Section 1.5 • labour Section 1.1 • laissez faire Section 1.5 • land Section 1.1 • leakages Section 1.3 • logic Section 1.4 • macroeconomics Section 1.1 • marginal Section 1.5 • marginal utility Section 1.5 • microeconomics Section 1.1 • mixed economy Section 1.2 • model Section 1.3 • monetarist/new classical model Section 1.5 • normative economics Section 1.4 • opportunity cost Section 1.1 • planned economy Section 1.2 • positive economics Section 1.4 • production possibilities Section 1.3 • production possibilities curve (PPC) Section 1.3 • rationing Section 1.2 • redistribution of income Section 1.2 • refutation Section 1.4 • resource allocation Section 1.2 • resources Section 1.1 • Say’s Law Section 1.5 • scarcity (key concept) Section 1.1 • sustainability (key concept) Section 1.1 • sustainable resource use Section 1.1 • theory Section 1.4 • utility Section 1.5 • what/how much to produce Section 1.2
Common misconceptions and challenges in Chapter 1
This section highlights topics that students may either be confused about or may fi nd more challenging to master.
1.1 Understanding the nature of economics 1. Students sometimes think of capital as money, due to a confusion with fi nancial capital which differs from physical capital. It must therefore be stressed that capital as used in economics refers to machinery, tools, factories, buildings and so on. 2. Students sometimes think of free goods as goods that can be obtained free of charge such as free education. It must therefore be stressed that free goods are those that are not limited by scarcity.
1.2 The three basic economic questions and how are they answered: resource allocation and output/income distribution 3. The section on Markets versus government intervention, and particularly the free market economy, planned economy and mixed economy, are diffi cult to understand as students have not yet been exposed to the market and how this works. For this reason you will fi nd a recommendation in the book that it will be helpful to review this part after studying Chapters 2 and 4-7. The material in this section will then be very straightforward.
1.3 Understanding the world by use of models 4. In the production possibilities model, there can be confusion over the meaning and causes of actual growth versus growth in production possibilities. Students sometimes confuse which is which. But with practice using the Test your understanding questions 1.9 (particularly questions 5 and 6) students will grasp the difference. 5. Also in the production possibilities model, students are sometimes challenged to understand why the PPC is bowed outward (concave), which is due to increasing opportunity costs as opposed to constant opportunity costs. Examples where two goods are produced using similar resources as opposed to two goods produced from different resources is very helpful to explain the shape of the PPC. 6. Students sometimes have diffi culty learning the circular fl ow of income model well enough that they can reproduce the diagram. Emphasis on the point that the two main decision-makers, households and fi rms are both simultaneously buyers and sellers who are linked together by the money they spend and receive can help. If students understand the logic of the model it should not be necessary to spend time memorizing it.
1.4 The method of economics
7. There may be some confusion over the difference between positive and normative economics, but with some practice such as in Test your understanding questions 1.11 students will understand the difference.
1.5 A brief history of economic thought: the origins of economic ideas 8. This section is very challenging for students who have not been introduced to any microeconomic or macroeconomic theory. It is extremely diffi cult if at all possible for students to follow the arguments here at any level of detail. There is therefore a recommendation in the book that students should come back to this section later in their study of economics. It is suggested that at the beginning of the course there should only be a very brief outline of the economists and topics covered in this historical account. When students come back to this section after having studied micro and macro, all the material in this section will fall easily and beautifully into place.
Teaching ideas in Chapter 1
The following activities are intended to engage students in the learning process, encouraging them to take on an active role by carrying out tasks, sharing their ideas, questions and fi ndings, and developing their skills, knowledge and understanding.
1 The PPC model Students model choices between school work and play as measured by hours on a PPC diagram. Have students share their model and comment on how they choose to allocate their resource (time). Important questions to consider: a After sleep, time to eat, and time to fulfi ll other obligations, how much time is left in the day to choose between school work and play? b Is the PPC likely to show constant or increasing opportunity costs (straight-line or bowed-outward PPC?) c What are the opportunity costs of more school work or more play (i.e. moving from one point on the PPC to another point on the PPC)? d What would need to change for the PPC to shift outward or inward? e Are there any limitations in the model?
2 Actual growth versus growth in production possibilities Students fi nd recent news articles that could be interpreted as a change in actual growth and/or a change in production possibilities. Draw PPCs and explain how they model the news event.
3 Commands versus markets
Small groups of students create lists of examples of the command method being used in their country. Follow with a discussion of how the market and command methods shape their personal lives and affect stakeholders such as households and fi rms. Challenge students to relate their examples to the three basic economic questions.
Students research real-world data related to a change in income/output distribution or a change in resource allocation. Provide a brief presentation to identify the cause of the change and what the change could mean for related stakeholders.
5 Normative versus positive economics and the method of economics
Have students make a normative economic claim and challenge them to support it using empirical evidence, logic and related positive economic claims.
6 Equity Have the class debate the concept of equity interpreted to mean greater equality. Ask them whether or not they believe they live in an equitable society. Can they think of societies they perceive as being more or less equitable than the society they live in?
