1. What is the purpose of economics?
2. What is the difference between microeconomics and macroeconomics?
3. Categorize each of the following issues either a microeconomic issue, a macroeconomic issue, or not an economic issue.
a The national unemployment rate b. The decision of a work overtime or not c. A family's choice to have a baby d. The rate of growth of the money supply e. The national government's budget deficit f. A student's allocation of study time between two subjects
4. Categorize each of the following conclusions as being the result of positive analysis or normative analysis. a. A higher minimum wage will reduce employment opportunities for minimum wage workers. b. Increase the earnings of minimum wage employees is desirable and raising the minimum wage is the best way to accomplish c. Everyone should enjoy open access to health care. d. Health care subsidies will increase the consumption of health
5. Suppose that one of your classmates is a hardworking student, serious about his classes, and conscientious about his grades. He is also involved, however, in volunteer activities and an extracurricular sport. Is he displaying rational behavior? Based on what you read in this chapter, construct an argument supporting the have conclusion that he is.
Translation Practice
dictionary if Translate the following text into fluent Persian. Use a necessary
Behavioral Economics and Bounded Rationality In recent years, some economists have proposed paying more attention to psychologists and psychiatrists. They have suggested an alternative approach to economic analysis. Their approach, which is known as behavioral economics, examines consumer behavior in the face of psychological and complications that may interfere with rational decision making.
Bounded Rationality
Proponents of behavioral economics suggest that traditional economic models assume that people exhibit three "unrealistic" characteristics: 1.Unbounded selfishness. People are interested only in their own satisfaction 2. Unbounded willpower. Their choices are always consistent with their long-term goals. 3. Unbounded rationality. They are able to consider every relevant choice .
Instead, advocates of behavioral economics have proposed replacing the rationality assumption with the assumption of bounded rationality, which assumes that people cannot examine and think through every possible choice they confront. As a consequence, behavioral economics suggest, people cannot always pursue their long-term personal interests. From time to time, they must also rely on other people and take into account other people's interests as well as their own.
Rules of Thumb
A key behavioral implication of the bounded rationality assumption is that people should use so-called rules of thumb: Because every possible choice cannot be considered; an individual will tend to fall back on methods of making decisions that are simple than trying to sort through every possibility.
A problem confronting advocates of behavioral economics is that people who appear to use rules of thumb may in fact behave as if they are fully rational. For instance, if a person faces persistently predictable ranges of choices for a time, the individual may rationally settle into repetitive behaviors that an outside observer might conclude to be consistent with a rule of thumb. The bounded rationality assumption indicates that the person should continue to rely on a rule of thumb even if there is a major change in the environment that the individual faces. Time and time again, however, economists find that people respond to altered circumstances by fundamentally changing their behaviors. Economists also generally observe that people make decisions that are consistent with their own self-interest and long-term objectives.
Behavioral Economics: A Work in Progress
It remains to be seen whether the application of the assumption of bounded rationality proposed by behavioral economists will truly alter the manner in which economists construct models intended to better predict human decision making. So far, proponents of behavioral economics have not conclusively demonstrated that paying closer attention to psychological thought processes can improve economic predictions.
As a consequence, the bulk of economic analysis continues to rely on the rationality assumption as the basis for constructing economic models. Advocates of behavioral economics continue to explore ways in which psychological elements might improve analysis of decision making by individual consumers.
Exercise 2.5 After reading the text, try to provide full answers to the following questions.
1. Define scarcity. Why does scarcity exist?
2. How does the economy grow?
3. When does the production possibilities curve will more outward?
4. What is your opportunity cost of attending a class at 11.00 A.M? How does it differ from your opportunity cost of attending a cl