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American Economist

A New Design For Introductory Economics

Qualitative And Quantitative Methods: A New Design For Introductory Economics

Michael Zweig

William Dawes [*]

Abstract

This paper describes and motivates a new approach to the introductory economics program. Beginning in 1997, a two semester introduction to economics has been offered at the State University of New York at Stony Brook. Instead of the usual micro-macro sequence, the two courses reported in this paper each present a one-semester introduction to both micro and macro principles. They differ in that one course presents the material in a narrative approach that emphasizes the social content of economic categories and relationships. In the other, students learn to work with these categories using more formal mathematical and computer-based methods. This complementary approach strengthens the student’s background for further study and exposes the student to notions of economics both as a social science and as an example of applied mathematics.

Background:

For nearly thirty years, until recently, we in the economics department at the State University of New York at Stony Brook offered a one semester introductory course. In it, we exposed students to the basic categories and relationships of microeconomics, macro, and international trade. The course was open to prospective majors and non-majors alike.

The course, ECO 101, led our majors into a two semester pair of intermediate theory courses, one each for micro and macro. These theory courses in turn opened up opportunities to take a variety of upper division courses. A small number of courses that required only the introductory course as a prerequisite were available for non-majors, and were open to our majors as well. By the mid-1990s we began to recognize a serious problem with ECO 101. We saw it first not in the course itself but in the performance of our students in subsequent courses. It became increasingly clear that ECO 101 was not preparing our students well enough.

They struggled in the intermediate theory courses, where the calculus and formal modeling methods gave them a very hard time (despite the fact that calculus was an enforced prerequisite for the courses). And, more generally, our students did not have a good sense of the behavioral and social content of economics, either. As we evaluated the introductory course in light of this experience, it became clear that we had expected too much from the course. It became clear that students’ exposure in ECO 101 could not give them both an adequate understanding of the institutional and human dimensions of the economy and the analytic methods they would need to succeed as economics majors.

To address these two sets of problems, we have revamped our introductory curriculum. We created two one semester courses, but not the usual two semester micro-macro sequence. Instead, we take the students through the materials of micro, macro, and trade twice. Once, in ECO 107, Introduction to Economic Reasoning (which Zweig teaches), and also in ECO 109, Introduction to Economic Analysis (which Dawes teaches). The different approaches of these two courses are the core of the innovation in our introductory material. We present here a preliminary work report describing our activity and the thinking that underlies it.

In ECO 107, the approach is primarily narrative and institutional. We use basic graphs and simple algebra, but the idea is to give students an opportunity to consider the social content of economics and its meaning as a set of human behaviors. In ECO 109, the approach is more mathematical and formal. The idea is to give students a chance to model economic relationships, with an eye on the more technical methods in economics used to understand the market mechanism. Computer based instruction plays a significant role in the course.

This way of presenting economics in two complementary courses recognizes that the discipline properly involves two complementary sets of issues and approaches. Economics is a study of the market mechanism as it operates to allocate scarce resources to competing purposes, in Lionel Robbins’ famous formulation. In this aspect, economics has evolved into something like a branch of applied mathematics. But economics is also a social science. The structures of production and exchange operate in history and embed a particular set of values. They operate through specific institutions and have profoundly different consequences for different people, depending upon their role in the economic process. In this aspect, economics opens up to collaboration with ethicists and all the social sciences.

A recent issue of The Wall Street Journal (November 30, 1998) contains two articles that together nicely express the problem we are trying to address in our curriculum at Stony Brook. The first story (p. 2) is about the recent substantial increase in the numbers of students majoring in economics across the country. We recognize many of our own students in the hopes reflected in the article: economics is a ticket to a high paying job after law school or an MBA. In tune with those sentiments, and the general zeitgeist of this era of capitalism triumphant, the article quotes Yale’s Merton Peck: “Economics, as it’s taught at Yale, is not an ideological subject. We don’t talk about whether capitalists are greedy but rather about the benefits of, say, a fixed exchange rate.”

Further into the paper that day (p. 17), there is a story about the tremendous overcapacity built in the last decade throughout the world in consequence of the competitive race among businesses for lower costs and increased market share, and the consequences of this unplanned but inevitable overcapacity for the coming worldwide shakeout. Describing this in the context of the global economy, the writer observes that “A moral dimension shadows the very notion of overcapacity when billions of people live in poverty.” The juxtaposition of these stories is all the more striking because the editors chose these two observations to be reproduced in large type as the pull-quotes to sum up the essence of the stories for those too busy to read them.

Economics must surely involve an exploration of the operational aspects of exchange rate regimes and the entire market mechanism. But this need not be to the exclusion of the human content and social consequences of the mechanism. Exploring these issues helps to make explicit the moral and ideological aspects inherent in any set of economic arrangements. Economists may have no special claim to decision authority on moral matters. But we should not be deliberately blind to the many ways that economic arrangements present these issues to us all.

Students cannot be properly introduced to economics without an appreciation of both the workings of the market as a mechanism, and the workings of the economy as a social structure. At Stony Brook, we are developing ECO 109 and ECO 107 to bring these issues to our students.

ECO 109, Introduction to Economic Analysis:

ECO 109 is structured around a series of quantitative economic models using both graphical and mathematical analysis. These models range from the linear supply and demand functions and profit-maximization for price taking and non price taking firms with explicit demand and total cost functions to the basic Keynesian macro model. The emphasis is on the development and use of those models to do formal analysis. The prerequisites for the course include at least Stony Brook’s basic precalculus-calculus course to insure they have had some exposure to simple differentiation. [1]

One of the primary objectives of ECO 109 is to be sure that students have enough understanding of the fundamental economic concepts and relationships to be able to translate among algebraic expression, graphical representation, and natural language forms of economic analysis. The emphasis is on encouraging students to master the skills needed to use formal models to analyze relationships among a relatively limited number of concepts rather than exposing them to a much larger set of concepts presented in a less formal context and in rapid succession. The approach used in ECO 109 requires that a successful student must continue to draw on earlier work and that work includes both learned concepts and acquired skills.

The second major objective of the course is to get students to be able to take two independently developed models or concepts and synthesize them into a third. For example, an important indication of their mastery of both fundamental concepts and critical thinking skills might be their ability to take a basic Keynesian model in which intended investment is treated as an exogenous variable and combine it with a simple model of intended investment as a function of internal rates of return and the interest rate to produce a model in which intended investment is now an endogenous variable and the interest rate is a new exogenous variable. Another example might be their ability to combine the concepts of opportunity cost and production possibilities frontiers to model absolute and comparative advantage.

Here are some examples of the kinds of problems [2] presented to students in EGO 109:

1. The following diagram shows the daily (linear) production possibilities frontiers for two individuals. As labeled in the diagram, these are the ppfs for individuals A and B. Both A and B produce Good X and Good Y using only their own labor and they both work 10 hours a day.

a. Estimate the opportunity cost of A producing an additional unit of Good X.

b. Who, if anyone, has a comparative advantage in the production of Good X?

c. Who, if anyone, has an absolute advantage in the production of Good X? In the same diagram, sketch their joint production possibilities frontier. Without reference to the particular ppfs shown in the diagram, suppose two people have individual linear ppfs. Is it possible for the same individual to have an absolute advantage in the production of both Good X and Good Y? If so, provide an example in the form of a graph of their individual ppfs.

2. A firm has a total cost function TC = .0003*X[conjunction]3 – .24*X[conjunction]2 + 70*X + 1000. The demand function for its output is X = 1000 – 20*Px.

a. Find the firm’s marginal revenue function.

b. Find the firm’s marginal cost function.

c. Using EXCEL to generate any graphs you need, estimate the firm’s optimal level of output.

3. The following diagram plots combinations of annual real disposable personal income and real consumption expenditures for the US for the years 1959 through 1995.

a. Use that diagram to estimate the level of autonomous consumption and the marginal propensity to consume in our simple macro consumption function.

b. Using your answer to a., predict the level of real consumption if real disposable personal income is 5,500 billion dollars.

4. In 1991, Nominal GDP for the US was estimated to be 5,916.7 billion dollars. Express this value in dollars, not billions of dollars. Hint:How many 0’s do you need to add?

Although many of the concepts addressed by these questions receive some attention in the traditional introductory economics curriculum, EGO 109 emphasizes the need for students to demonstrate a high degree of mastery of the formal meanings and implications of economic concepts, not just the reproduction of material presented in the textbook. It is important to note that if students are unable to answer most of these questions correctly, asked in different ways, in different contexts and on an ongoing basis, any true understanding of concepts such as price elasticity of demand or the implications of disequilibrium in a simple macro model, to say nothing of things like “double coincidence of wants” and “drop-in-the-bucket problem” (consecutively listed boldfaced terms in the glossary of a widely used introductory economics text), is likely to elude them.

These questions also emphasize the importance EGO 109 places on developing students’ understanding of the concepts so that they are able to handle not just the same kinds of problems presented in different forms but to be able to combine two concepts to generate additional concepts and insights. For example, if they can’t “add” individual demand curves to get a market demand curve, they don’t understand the relationship between individual and market demand curves, or indeed what a market demand curve represents. In a similar fashion, if they can’t combine two individual (linear) production possibilities frontiers to get a joint production possibilities frontier, it is extremely unlikely that they will develop any real understanding of such important concepts as opportunity cost (as represented by the slope of a production possibilities frontier), comparative advantage, and absolute advantage.

It is also important to recognize that a great deal of the information and understanding necessary to a mature economic perspective of the world is simply omitted from the curriculum used in ECO 109. For example, there is almost no mention of the institutional or historical context of economics and even less consideration of the societal aspects of economics that lie at the core of the ECO 107. The material in ECO 109 is presented without reference to opinion or moral consideration. The course is a direct formal development of a limited number of concepts using explicit economic models. As students are told at the start of the course, success in ECO 109 requires mastery of relatively few concepts, but those concepts have very sharp edges.

ECO 107, Introduction to Economic Reasoning:

ECO 107 begins by placing the market mechanism into a social context. This involves some discussion of historical systems that have addressed in various ways the basic questions of “what, how, and for whom” economic activity takes place. The course goes beyond the juxtaposition of market with command systems, introducing students also to slave and feudal methods. The market as a mechanism, capitalism as a social system, and price as a rationing device then emerge as particular instances of human experience, placed in history, rather than universal and timeless truths, as is often the impression if the technical workings of the market mechanism itself are the sole focus of the course.

The course then turns to the market and issues of microeconomics. As in any course, especially a one semester introductory course, careful choices must be made about scope. Important matters are necessarily left out. In the microeconomic part of ECO 107, where the emphasis is on conveying a sense of the social aspects of the market, we stress the following: scarcity and opportunity cost; demand, supply, and the relation between individuals and firms on the one hand and markets on the other; marginal thinking and maximization; equilibrium; and market failure.

Each subject is presented with the standard graphical tools, but formal modeling is left to ECO 109. In ECO 107, students grapple with the meaning of the categories in social and behavioral terms. If a market clears, is the product no longer scarce? What does it mean that product costs include the opportunity cost of capital? What happens when someone is priced out of a market moving towards equilibrium? We ask students to explore the proposition that the goal of life is to be happy, and what that has to do with possessions.

Thinking on the margin is among the most powerful of tools economists bring to social understanding. We bring it out through the profit maximizing output decision of the firm. Rather than dwell on the mathematical properties of the maximization process (which is the focus in ECO 109), the students spend time trying to understand conceptually what marginal thinking brings to the problem, how to understand the balance of small changes, how to think about benefits and costs. One point in the discussion, anticipating in some ways the problem of externalities, is the warning that it often happens that the people paying the costs are not the ones receiving the benefits, so that the unit of account needs to be clearly kept in mind.

Marginal thinking comes up over and over in economics and is reinforced through repetition in various contexts. In ECO 107, we introduce the idea of marginal productivity and its relation to factor compensation and employment to provide an additional microeconomic example of thinking on the margin. Again, the point is the conceptual process. In ECO 109, consumer choice and utility theory provide the vehicle for a more formal treatment of the same basic material.

The problem of market failure takes on added scope and significance when the market is presented in its social context. The usual recognition of public goods and externalities is augmented by discussions of poverty, increasing inequality in the distributions of income and wealth, and the concentration of economic (and political) resources in market society.

In a way, all of modern macroeconomics (but not classical growth theory) follows in consequence of market failure. The widespread and persistent unemployment of the Great Depression was not only a market failure. Its existence was a demonstration of the failure of an economic analysis that seeks to derive the economy as a whole from the microeconomic building blocks of single markets and the individual actions of producers and consumers.

In ECO 107, macroeconomics follows micro. Again, we choose only the most basic categories and problems. We talk about the social meaning of unemployment, inflation, and deflation. After stating the problem, we begin by introducing the categories of aggregate analysis. In the spirit of the course, we emphasize that GDP is divided into C, I, G, and net exports to reflect the different behavioral underpinnings of each, and describe their behavioral content. The notion of macroeconomic equilibrium is compared with the meaning of equilibrium in single markets. Our treatment of money and banking stresses the concrete activities and institutions involved in the Fed’s regulation of the money supply. The step by step explanation of the money multiplier parallels the explication of the multiplier in fiscal policy. The basic equations, graphs, and t-accounts are introduced, but the emphasis is on the underlying behaviors and policy alternatives.

We believe that no student should leave an introductory economics course without some knowledge of international economic activity. There is no time to talk about the effects of an open economy on macroeconomic policy, or any number of other critical economic issues. We are limited to a presentation of the most basic categories needed to understand the global economic network. As with our treatment of micro and macro, themselves essential for any real discussion of international economy, we are limited to the most basic building blocks.

The discussion begins with absolute and comparative advantage, and a deepening of the exposition of gains from trade already anticipated in the historical material on the origins of the market-based economy at the start of the semester. We present basic facts of the trading patterns for the United States and claims in the debate about free trade. We define export and import behavior and distinguish between current and capital account to get at the conceptual differences between the flow of goods and services and the flow of capital. We introduce the existence of currency markets and the problem of establishing exchange rates. With this material, as with the entire course, the emphasis is on explaining the economic and behavioral meaning of the categories, rather than the relationships as they might be expressed in analytic (or accounting) terms.

Some Concluding Observations:

One major benefit of the Stony Brook way of structuring introductory economics is that the specific approach used in each of the individual courses allows for a focus on and reinforcement of the particular insights and skills specific to that approach. In our view, there is a crucial intellectual divide in economics other than the traditional micro-macro split. It is the divide between economics as a study of the market mechanism and economics as a study of the economy as a social process. The Stony Brook approach fully exposes this distinction and trains students in each aspect, as each contributes its own insights to the essentials of micro, macro, and trade. The traditional micro-macro split at best tries to present both perspectives in each course. This runs the risk of confusing the students or letting them get by while using one perspective without developing their skills with the other.

The distinction between ECO 107 and EGO 109 is not the usual micro-macro distinction. The difference lies in the scope of subject matter and the object of study each takes. These differences are also associated with a difference in appropriate skills. Because of the intellectual history of the discipline, economics as a study of the market as mechanism, whether operating at the micro or the macro level, whether domestic or international, tends now to rely on mathematics and formal modeling. On the other hand, economics as a study of social relations, again whether at the level of the firm, the market, or the aggregate economy, domestic or international, tends to use a narrative approach, with formal modeling playing a subsidiary role. The Stony Brook approach to the introductory course focuses more deliberately on developing these quite different types of skills, each presented in the subject matter for which they are most appropriate, recognizing that a well trained economist needs facility in both.

Because ECO 107 does not rely on strong quantitative skills, it provides an opportunity for students to gain an understanding of the basic social content of economics while not allowing students with strong mathematics backgrounds to get by without improving their abilities to deal with non-quantitative material. When students take ECO 109, on the other hand, they have no choice but to develop their skills at mathematical and graphical reasoning, while the students who are already relatively proficient in those areas are able to build on their skills.

The combined experience of the two courses should force both kinds of students to draw on those skills in which they are already relatively competent while improving those in which they are weakest. Introduced to both approaches, students should develop a more sophisticated understanding of the economy. We are pleased to report that in the first year and a half of experience, students going from either course to the other have commented on how valuable they have found the first course to be while taking the second.

A second advantage of our approach is that it allows student to choose the form of their initial exposure to economics. Students with strong interests in the humanities and other social sciences but without strong mathematics background are likely to find ECO 107 to be the more attractive course with which to start their study of economics. It also gives them time to take the calculus course required for ECO 109. Alternatively, students with interests in the sciences, engineering, and mathematics tend to be more comfortable starting with ECO 109. It is also the case that students with strong backgrounds in mathematics but limitations in English (many of our foreign students, for example) tend to start with ECO 109. Just as the traditional micro-macro split is not a sequence, but a combination that can be taken in either order, or singly, so our two introductory courses are not a sequence but a combination.

With the Stony Brook approach, students who want or need only a single course in economics can choose the approach with which they are more comfortable while still getting exposure to the basics of micro, macro and trade. In the traditional micro-macro split, students must take two courses to get an initial exposure to the breadth of economics we want students to experience in the introductory course or sequence.

Our experience with the 107/109 combination is still quite limited. After three semesters, we are making adjustments and working out better materials to strengthen each course. Preliminary results do suggest that the approach has promise and might provide a useful model for introductory courses elsewhere.

(*.) Michael Zweig [less than]mzweig@notes.cc.sunysb.edu[greater than] and William Dawes [less than]wdawes@notes.cc.sunysb.edu[greater than] are, respectively, Professor and Chair, Department of Economics, SUNY at Stony Brook.

Notes

(1.) The expectations for the level of retained mathematical proficiency which students bring to ECO 109 are rather low.

(2.) For the sake of brevity, all the diagrams referred to in the questions have been omitted from this paper.

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