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). Discussing some of these, or another, example is a useful way to review some important economic concepts such as scarcity, making tradeoffs, building economic models to explain how consumers and firms make decisions, and the distinction between competitive and non-competitive markets. Parts I and II of the text assume competitive markets, market power is discussed in Part III, and some consequences of market power are discussed in Part IV of the text.

Review Question (2) illustrates the difference between positive and normative economics and provides for a productive class discussion. Other examples for discussion are available in Kearl, Pope, Whiting, and Wimmer, “A Confusion of Economists,” American Economic Review (May 1979).

The chapter concludes with a discussion of real and nominal prices. Given our reliance on dollar prices in the chapters that follow, students should understand that we are concerned with prices relative to a standard, which in this case is dollars for a particular year.

QUESTIONS FOR REVIEW

1. It is often said that a good theory is one that can be refuted by an empirical, data-oriented