Section 1.1 Economics: A Brief Introduction
1. The definition of economics must recognize the central parts of the economist’s point of view:
Resources are scarce, scarcity forces us to make choices, and the cost of any choice is the cost of the
lost opportunity with the highest value.
2. a. Microeconomics
b. Macroeconomics
c. Microeconomics
d. Macroeconomics
e. Microeconomics
Section 1.2 Economic Theory
3. a. The first is positive and the other is normative. The first statement (a positive statement)
expresses a fact or a testable theory that a higher income tax rate would generate increased tax
revenues. The second statement (a normative statement) expresses an opinion regarding how any
additional tax revenues should be used.
b. Both are normative statements that express opinions. The first regards the relative value of
studying physics as opposed to studying sociology, and the second regards the value of studying
either physics or sociology.
c. Both statements are positive. They are expressions of facts or testable theories regarding the
relationship between the price of wheat and how much wheat will be purchased and produced.
d. The first is positive and the other is normative. The first statement (positive) expresses a fact or
testable theory regarding the relationship between the price of butter and how much will be
purchased. The second statement (normative) is an expression of opinion about the social value of
buying butter.
e. Both statements are positive. They are expressions of fact or testable theory regarding
demographic change.
4. a. Positive. The statement is a testable hypothesis.
b. Normative. Asserting that funding for social assistance should be reduced contains a value
judgment about the costs and benefits of doing so.
c. Positive. The statement expresses a fact or a testable theory that tariffs will result in higher prices
for domestic wine.
d. Positive. The statement could be confirmed or refuted by empirical data.
e. Normative. A benefit of charging a provincial sales tax on Internet sales is that it will level the
playing field with non-Internet retailers. However, a cost of this same tax is that it will reduce
total Internet sales and possibly have other negative effects. The statement implies a value
judgment that the benefits outweigh the costs.
f. Positive. The statement is subject to empirical testing.
5. a. This involves confusing correlation with causation.
b. This involves confusing correlation with causation.
c. This involves the fallacy of composition.
d. This is a violation of the ceteris paribus conditions.
e. There is no fallacy in this statement.
6. Observation and prediction are more difficult in economics than in chemistry because, unlike
chemists, economists generally cannot observe behaviour in a laboratory setting where all relevant
environmental variables can be carefully controlled. Economists study economic behaviour in the real
world, where many variables influence behaviour simultaneously. It is difficult in a complex global
economy to observe and predict relationships between variables, isolated from other effects.
7. Economics is concerned with reaching generalizations about human behaviour. If you generalize on
the basis of observed individual behavior, you risk committing the fallacy of composition.
Generalizations based on observed group behaviour are likely to be both more realistic and useful
(reliable).
Section 1.3 Scarcity
8. Being poor means that you have access to few resources, which limits the goods and services you
consume. Scarcity means you don’t have enough resources to do everything you want to do, so you
have to make choices. Everyone experiences scarcity, because we can always think of more things
that we want than we can produce with our resources.
9. The automobile freed Canadians to travel and helped to create the tourism business. New wants
included motels, resorts, and theme parks. The increased importance of automobile and truck
transportation also created the desire for more and better roads and highways. The automobile also
allowed people to live farther from where they worked, so that people wanted more land and newer
houses.
10. Scarce goods are those that people pay for in either time or money or, in other words, have an
opportunity cost. Garbage and dirty air in the city are not scarce goods since we either pay to get rid
of them or pay with the consequences of their presence. Similarly, salt water is not a scarce good.
Although it is in limited supply, the current abundance of salt water makes it seem limitless. Clothes,
clean air, and public libraries are scarce goods because their production requires the use of scarce
resources that could be used for the production of other goods.
Section 1.4 Opportunity Cost
11. Since Sarah’s time is probably worth more during the school year (it would cost part of her salary),
the opportunity cost of the trip is higher in February than in July.
12. The opportunity cost of this decision valued in dollars would be $33.50 ($30 forgone pay for not
tutoring for two hours + $3.50 for the cup of coffee).
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