Chapter 1 Essay

1823 Words Aug 18th, 2013 8 Pages
PART I

INTRODUCTION:
MARKETS AND PRICES

CHAPTER 1
PRELIMINARIES

TEACHING NOTES

The first two chapters reacquaint students with the microeconomics that they learned in their introductory course: Chapter 1 focuses on the general subject of economics, while Chapter 2 develops supply and demand analysis. The use of examples in Chapter 1 facilitates students’ complete understanding of abstract economic concepts. Examples in this chapter discuss markets for prescription drugs (Section 1.2), introduction of a new automobile (Section 1.4), design of automobile emission standards (Section 1.4), the minimum wage (Section 1.3), the market for sweeteners (Section 1.3), and real and nominal prices of eggs and education (Section 1.3).
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If a theory cannot be tested, it cannot be accepted or rejected. Therefore, it contributes little to our understanding of reality.

2. Which of the following two statements involves positive economic analysis and which normative? How do the two kinds of analysis differ?

a. Gasoline rationing (allocating to each individual a maximum amount of gasoline that can be purchased each year) is a poor social policy because it interferes with the workings of the competitive market system.

Positive economic analysis describes what is. Normative economic analysis describes what ought to be. Statement (a) merges both types of analysis. First, statement (a) makes a positive statement that gasoline rationing “interferes with the workings of the competitive market system.” We know from economic analysis that a constraint placed on supply will change the market equilibrium. Second, statement (a) makes the normative statement (i.e., a value judgment) that gasoline rationing is a “poor social policy.” Thus, statement (a) makes a normative comment based on a conclusion derived from positive economic analysis of the policy.

b. Gasoline rationing is a policy under which more people are made worse off than are made better off.

Statement (b) is positive

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