Introductory Microeconomics

Specific Skills for Economics

First level
Some students whose study of mathematics at secondary school did not proceed very far, or who have not had to deal with mathematical concepts for many years, have some doubts as to their ability to successfully study economics. This doubt is generally unwarranted. You should be quite clear that economics is not mathematics. Mathematics is a tool which economists sometimes use. Certainly a knowledge of mathematics is very useful, but we believe that you can go a very long way in economics without resorting to highly sophisticated mathematics, and we teach on that basis.

The study of relationships

ECONOMICS IS THE STUDY OF RELATIONSHIPS and can be expressed in WRITTEN ENGLISH, DIAGRAMS and EQUATIONS. All these techniques will be used in the following examples to clearly illustrate the approach necessary for the beginning student in this discipline. The following extract is extremely important and I would advise you to keep it in mind throughout your travels into the world of economics:
In a letter to Arthur Bowley, Alfred Marshall said of the use of mathematics:1 1. 2. 3. 4. 5. 6. use mathematics as a shorthand language rather than engine of enquiry keep them until you have done translate into English illustrate by examples that are IMPORTANT in real life burn the mathematics if you cant succeed in (4), burn (3).

Marshall, A. Memorials, p.427. 1

Introductory Microeconomics

The above reflects the economics program delivered through the Gippsland campus, which is language based, and where the emphasis is on geometry supported by maths.

What is mathematics and why is it useful?

Using mathematics in economics is not a substitute to understanding the theory and it will not advance you very far on its own. Rather, maths can be seen as a type of shorthand which can be used to supplement your understanding of economics. In particular, it is an excellent companion for diagrams and at times may be required to replace diagrams when the factors involved become too complex. For example, if you have four variables, how do you draw a four-dimensional diagram? An alternative view of mathematics:
Mathematics is like a mountain range. Down in the plains, where most of us live, we see the mountains only at a distance. The foothills are a little nearer, but they are covered with Number Plants which grow in great profusion, emitting soporific doses of tedium whenever an innocent mind passes nearby. ... Getting beyond the foothills into the mountains is no easy matter. The only way is through Passes, and these are patrolled by Pass Holders, a faceless cartel if ever there was one, who harry and hassle you, and make you perform a devilishly cunning trick: you must tell them about items in the Knowledge Box without seeing them beforehand. And, unless you are least fifty per cent right they wont let you pass.2

I wish to inform you that you will face no such Pass Holders, but rather tour guides through the foothills and into the mountains. Even then, you are not expected to become a mathematician or even a mathematical economist, but a well-rounded student of economics who is familiar with some mathematics found in the literature.
I encourage the view ... that a rigorous understanding of mathematics isnt necessary if you wish to find your way around the literature, any more than a degree in fine art is necessary if you wish to find your way around the Louvre. You dont need to know Ohms Law to switch on a light you only need to know where the switch is.3

The switch is very easy to find!!!

Where to start: At the beginning, of course!

Here is some preliminary information which is all too often assumed to be known by students when textbooks and other material makes frequent reference to it. Not understanding the very basics can leave out important links of the mathematical chain and large chunks from your understanding.

2 3

Kennedy, G. (1982). Mathematics for Innumerate Economists, p.3. ibid. 2

Introductory Microeconomics

When progressing through, refer back to this section time and again as it is often the simplest missing link that will trip you up on your journey into the mountains.

Some basic maths language

Mathematics is just one more method of studying relationships. A relationship can be expressed in mathematics with the use of an equation.

Equation
An equation makes two things which are related to each other equal. It balances these things to make them the same amount, one on each side of the equals sign (=).

Example

100 = 50 2 An equation tells you that the left-hand side must be equal to the right-hand side. That is: 100 equals 50 times 2. Imagine an equation as being a boat on a lake for which both sides must have equal weight or else the boat will tip over and sink. Equations are the main method of expressing relationships in mathematics and enable us to solve problems. You will come to know the main type of equation in economics, that of equilibrium.

Variables
As the name suggests, a variable is something that can take on different values or is able to change. Since each variable can assume various values, it must be represented by a symbol instead of a specific number.4 The most common variables used in mathematics are x, y, a, b, c, or letters from the Greek alphabet. In economics, similar symbols are used in addition to some more specialised ones such as P (price), Q (quantity), Y (income), and I (investment). Variables are very useful when trying to solve a problem.

Example 1
If I am a lollipop manufacturer and sell my lollipops for 50 cents ($0.50) each, how many lollipops will I need to sell in order to take $10.00 in revenue for the day? This can be solved by setting up an equation and using l as a variable for the number of lollipops that need to be sold. $10.00 = $0.50 l

Chiang, A.C. (1984). Fundamental Methods of Mathematical Economics, p.8. 3

Introductory Microeconomics

Now l can be solved to find out how many lollipops need to be sold to make $10.00 for the day. (20)

Example 2
I would like to see how much revenue I could raise in a day by selling various amounts of lollipops at 50 cents each. In this case, our equation will contain two variables: l for the number of lollipops and R for the level of Revenue. R = $0.50 l Neither R nor l can be solved without knowing the value of one of these variables. To solve the problem, various amounts can be substituted forlto test how much revenue could be made in a day. If 2 lollipops are sold, R = $1.00. If 5 lollipops are sold, R = $2.50, and so on ...

Example 3
I would like to see how much revenue I could raise in a day by selling various amounts of lollipops at various prices. In this case, our equation will contain three variables: R=lP where P stands for Price. A solution to this equation cannot be found unless we give values to two of the three variables. That is, P and l need to be known to calculate R. Or R and P need to be known to calculate l. Or R and l need to be known to calculate P. The more variables used in an equation, the more general that equation becomes and the more possible solutions there are. Notice that the only equation that was able to be solved without substituting more values was the first one. This brings us to a general rule for equations: An equation can be solved only where the number of variables is equal to or less than the number of equations. In Example 1, the number of variables and equations were equal at 1; the equation could be solved. In Example 2, the number of variables was 2 and number of equations 1; the equation could not be solved without reducing the number of variables to 1 by substituting various amounts of lollipops.

Introductory Microeconomics

Before leaving variables!!! There is one more aspect of variables which is crucial to economics and which you must NEVER forget when dealing with an economic relationship or model (words, diagram or equation.) The variables appearing in the equation are said to be endogenous to the model. This means that these factors (variables) are internal to this particular relationship. In other words, these variables are the only things that can affect this equation. All other factors are assumed to remain constant (ceteris paribus). From the example above, the only things that affected my revenue from lollipop production were the price (P) and the number of lollipops sold (l). Other factors such as: the weather, the price of sugar, the size of my factory, the number of other lollipop producers, were all assumed to remain constant. None of these factors were able to influence my revenue from lollipop production because they were assumed to be held constant. Such factors are known as being exogenous to the model or outside this particular relationship.

Constants
Constants are things (numbers, values or symbols) that do not change. These are quite often used with variables to make up an equation and are very important in establishing a relationship. A constant will most often appear in an equation as a number.

Example
= R VC FC Where = Profit (meaning this symbol stands for Profit) R = Revenue VC = Variable Costs FC = Fixed Costs Since fixed costs will not change regardless of the level of production, it can be regarded as a constant. For example, if fixed costs equal 100, the equation would be: = R VC 100. 100 is the Constant in this equation. The other factors (profit, revenue, variable costs) are all variables as they would change with the level of production.

Example
Qd = 50 2P (2P means 2 times P) Where Qd = Quantity demanded P = Price This example has two constants, 50 and 2. The 50 tells you that if price is zero, Quantity demanded will be fifty; however if the price is more than zero, Qd will be something less than fifty. In this example, quantity demanded has a specific relationship with price; an inverse or negative relationship. That is,
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as Price increases, Quantity demanded decreases. A quick look at the equation will give you this information; it contains a minus (negative) sign before the 2P. For this equation, the 50 and the 2 will never change regardless of which values the variables Qd and P take on.

Function
A function is a special type of equation which holds no mysteries and can most often be used interchangeably with the word equation. It simply refers to a cast where there are two variables in an equation and is best explained by an example.

Example
Qs = 10 + 5P Where: Qs = Quantity supplied P = Price This equation is a function because for each value possible for P there is only one corresponding value for Qs. In other words, each different amount that can be substituted for P will determine a unique solution for Qs. If the value 3 is substituted for P, Qs will equal 25. No other value for P will give the answer 25; this is a functional relationship. You may see a function written as Qd = f(P): which means Quantity demanded is a function of Price or Quantity demanded depends on price. A function allows you to make a general statement about the relationship; quantity demanded has a relationship with price.

Solving equations
The power of equations can be found in problem-solving. Using equations makes problem-solving quick and ensures that logic is adhered to. It means that you dont have to use a lot of mental power to work out the answer, you just have to remember one simple rule ... DONT LET THE BOAT SINK! Remember the equation boat from your introduction to an equation? If you do not keep the weight equal on both sides, the boat will sink. Keeping the weight equal on both sides is easy. Whatever you do to one side of your equation boat, you must immediately do to the other. If you add 10 more passengers to one side, you must immediately add 10 to the other side. If you double the number of passengers on one side, you must double the number of passengers on the other. This special knowledge of the equation boat will allow you to solve any problem.

Example
You have 1000 kg of cargo on one side of your equation boat. The other side will have been filled with passengers of equal weight. Passengers each weigh 60 kg. How many passengers will you need to load? Remember that one small mistake will sink the boat. 1000 kg = 60 kg N (number of passengers)

Introductory Microeconomics

We need to solve this equation for the number of passengers but first must check that this equation is solvable. One variable (number of passengers), one equation means that we can solve for N. To solve for N, you will need to have N on its own such that N equals some number (you want to know how many passengers to load). The above equation does not show N on its own, it is multiplied by 60 kg. In order to have N on its own, we will need to divide N by 60 kg. That is: 60 kg times N divided by 60 kg will equal N. BUT DONT SINK THE BOAT. If you divide the right-hand side (RHS) by 60 kg, you must also divide the left-hand side (LHS) by 60 kg. The equation should now read: 1000 kg 60 kg = 60 kg N 60 kg Now calculate both the left-hand side and the right-hand side: 16.67 = N The number of passengers to load on your boat is 16.76.

Example
Find the price that should be charged by a producer when the Quantity supplied is 50 and the equation is as follows: Qs = 10 + 5P substituting 50 for Qs, the equation reads: 50 = 10 + 5P. To solve for the price we need P on its own; do this in two steps. 1. Minus 10 from both sides 50 10 = 10 + 5P 10 40 = 5P 2. Divide both sides by 5 40 5 = 5P 5 8=P The price that needs to be charged when Qs = 50 is $8.00. What would happen if we did not know Qs, could we solve this equation? No, because the number of variables is 2 and the number of equations is 1. In order to solve for both Qs and P, we need two equations.

Introductory Microeconomics

Equations and graphs

Each equation containing one or two variables can be related to a twodimensional graph known as the coordinate system, so named because a pair of variables will give you a location on the graph. This is exactly the same as pinpointing a location on a street directory or map. The link between this map and the equations is very important and could well be your directions into the maths mountains. You will notice that the coordinate system is divided into four quadrants, each line being an axis and representing one of the variables that you are using. Sometimes the vertical axis is labelled y and the horizontal axis x as is used in pure mathematics. This labelling is not always used in economics because we are more interested in specific variables (P, Q, etc) rather than general ones.

The centre of the four quadrants is known as the origin and represents zero for each of the axes. Think of this as the starting point for your journey, and if in trouble, always return to the origin. Notice that the axes extending to the right and up both have positive numbers while those extending to the left and down have negative numbers. This is to ensure that the full set of all possible real numbers is included. In economics, however, we are most often concerned only with positive amounts of both variables. Consequently, the top right-hand quadrant is mostly the only one used.

Introductory Microeconomics

A word of warning!!! Beware of the dreaded number plants, they are sent to trick you. Be confident in the knowledge that the origin always represents zero. Moving away from the origin in a rightward or upwards direction will give increasing positive values REGARDLESS OF WHAT THE LABELS SAY!!! Remember that numbers are just labels too. Think more of a measuring system where you are counting the number of paces you have walked away from the origin; the further you walk, the more paces accumulated. Similarly, moving towards the origin will give lower positive values. Think of walking backwards, thus reducing the total number of paces (distance) walked. You will see that a particular point anywhere in this space represents a coordinate, for which can be given a number from each of the vertical and horizontal axes. A series of coordinates can be plotted and joined to form a line or curve which defines a relationship between the two variables. In order to plot the relationship in the form of a curve, the coordinates must first be accurately found in accordance with the relationship. This is where an equation is used. Remember that an equation is a shorthand way of expressing a relationship and uses variables and constants to do so.

How to draw an equation

Drawing an equation means plotting the relationship on a graph using the information contained in an equation. To do this, a series of coordinates need to be found so that you can join the dots and draw a curve (which may indeed be a straight line.) Remember that if we have one equation with two variables, the equation cannot be solved ... but it can be drawn.

Example
Qs = 10 + 5P Unless we substitute in a value for P, we cannot solve for Qs. Drawing the equation allows you to substitute in many values for P to find out various values of Qs: that is, plot the relationship. There are some rules to follow:

Introductory Microeconomics

1.

A two-dimensional graph can only be drawn when the equation contains two or less variables (one for each dimension.) If an equation has four variables, we cannot draw a diagram at all (what is the fourth dimension?) The variable on the left-hand side (LHS) of the equation is usually known as the dependent variable. This is because it depends on right-hand side. The variable on the right-hand side (RHS) is known as the independent variable. In the example above, Qs is the dependent variable while P is the independent. The dependent variable is placed on the vertical axis (sometimes referred to as the Y axis) while the independent variable is placed on the horizontal axis (sometimes referred to as the X axis.) In the example, Qs would be placed on the vertical axis and P on the horizontal. Coordinates are always written with the horizontal axis variable first and the vertical axis second. For the example above: a coordinate (3,25) would mean that P = 3 and Qs = 25.

2.

3.

4.

To plot a curve on a set of axes, select a few values for P (horizontal axis) and calculate the appropriate value for Qs to make up some coordinates. P Qs 0 10 1 15 2 20 3 25 4 30 5 35

To calculate the Qs values, just substitute each value of P into the equation to find the appropriate Qs value (see the previous heading solving equations). This activity will give you a set of coordinates to plot: (1,15) (2,20) (3,25) (4,30) (5,35). Once again, this is no different to reading a street directory ... find the location and put a point there.

Now join the dots that is the relationship.

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If you are not sure what the relationship is ... draw it. Drawing the equation will give you immediate information as to whether it is a positive, negative or no relationship. There is an easier way to graph the equation. This method can be used as long as the equation is linear (a straight line.) That will be the case for most economic equations that you will be asked to plot. Each linear equation contains two constants and two variables. The variables tell you what goes on the axes (P and Qs) while the constants give specific information about this relationship. For the example above, not only do we know that this is a relationship between P and Qs, we also know that if P equals zero, Qs equals ten and we know that for every increase of P by one, Qs increases by five (because of the 5P.) These two extra pieces of information are very important and are all we need to plot the relationship between P and Qs. Only two points are required to draw a straight line: 1. When P equals zero, 5P also equals zero, so Qs equals 10. The coordinate is (0,10) or the curve cuts the vertical (Qs) axis at 10. This is known as the vertical axis intercept of the equation. From the vertical axis intercept, for every increase of 1 in P, Qs increases by 5. Beginning at (0,10), count across 1 and up 5 and place a point there. The five is known as the slope of the curve (equation or relationship.) The simple way to calculate the slope is to remember, RISE OVER RUN. This means that when calculating the slopes value, always divide the vertical distance by the horizontal distance ... rush over run. In the above example, the rise would be 5 and the run would be 1. Five divided by one equals five.

2.

So just by looking at the equation, you can quickly determine the intercept and the slope of a function and plot the curve.

Example
Qd = 50 2P Vertical Axis intercept (Qd on vertical Axis): Slope: 50 negative 2

Example
C = 100 + 0.5Y Intercept: Slope

100 0.5

Notice that the sign in the middle of the equation determines whether the slope is positive or negative.

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Sometimes there will be no slope: I = 1500 Intercept: Slope: Sometimes there will be no intercept: TR = 3Q Intercept: Slope: 0 3 1500 0

Solving using graphed equations

Even though you are able to plot one equation, that doesnt mean that you have solved the equation because you have lots of answers (the amount of Qs depends upon what the price is). With two variables, two equations are required before we can solve for the variables. For example, if we would like to solve for the equilibrium price and quantity, we need two equations, demand and supply. Qs = 10 +5P Qd = 50 20P Given this information, you can now plot both equations on a set of axes (Q on vertical axis and P on horizontal) and read the equilibrium values from the graph. To do this just find the intersection of the demand and supply curves. Notice that this is exactly the same as making the Qs equation equal to the Qd education.

Equation short cut

If you have the equations and not the graph, a quick way of calculating the equilibrium values is to make Qs equal to Qd. If Qs = Qd, then: 10 + 5P = 50 2P. Now we have one equation and one variable (P), we can solve for P. REMEMBER the equation boat! You need to get the Ps on one side and the constants (numbers) on the other. 1. 2. 3. Minus 10 from both sides: Add 2P to both sides: Divide b.s. by 7 5P = 40 2P 7P = 40 P = 5.71

To find the quantity, substitute P = 5.71 into either of the above two equations: Q = 50 2 5.71 Q = 50 11.42 Q = 38.58 This short cut is one way of using two equations and two variables to gain a solution and is known as one method of using simultaneous equations.

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One last example

The Aggregate Demand Model Y = C + I + G + NX where: C I G NX = = = = 100 + 0.4 300 200 50

Y = 100 + 0.4GDP + 300 + 200 + 50 Y = 650 + 0.4GDP Intercept: Slope: 650 0.4

To find the equilibrium level of GDP and Y, we need two equations. You know that due to the circular flow Y = GDP ... this gives you a second equation (and represents the 45 degree line). Intercept: Slope: 0 1

With these two equations, we can solve by saying that since Y = GDP: GDP = 650 + 0.4GDP 1. 2. Minus 0.4GDP from both sides Divide both sides by 0.6 0.6GDP = 650 GDP = 1083.33

End of the guided tour

This should be enough to get you started in the world of mathematics and will certainly help you with first-year economics. As you can see, there is nothing to be afraid of with maths. In fact, it can be very useful and save you a lot of time if you know how to use it. Best wishes for the remainder of your journey.

Second level
Simple solutions for second-year economics
The intermediate units taught in the second-year of economics make use of more advanced models and concepts. It is here that some mathematical knowledge can make your life a lot easier and deepen your understanding of the concepts. The mysteries of marginal analysis, diminishing returns and elasticity can be solved using mathematical tools, particularly differential calculus.

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The margin
The margin is a frequently used concept in microeconomics and forms the basis for most of the intermediate study. When speaking of the marginal unit, we mean the extra chocolate bar consumed or the extra person employed or the extra umbrella produced, so we are therefore talking about the change from one moment to the next. The marginal amount or change is very easy to calculate (or just see) with a straight line curve because anywhere along the curve, the slope of the curve will be the same, regardless of the starting point. However, much of the marginal analysis needed for second-year economics deals with production possibilities frontiers, indifference curves and isoquants which very rarely present themselves as straight line curves. If they are not linear curves, the amount of change from one point to another will be different for each point along the curve because the slope of the curve is different at each point. Therefore, each time you need to find the slope of a particular curve, you must first choose a point, draw a line to the next point and measure the slope of that line, which could become very tiresome and time consuming. A much easier approach is to learn the simple rules of differential calculus which would allow you to accurately find the slope and perform a whole range of useful functions. When would calculus be useful?

When you have an equation to match a graph quick and accurate to find the slope of the curve. When you need to look at a relationship which includes more than two variables it is impossible to draw a graph but much information can still be drawn from the equation. When a general statement or calculation needs to be made without figures.

Differential calculus is also a valuable tool for constrained optimisation exercises where you are required to find equilibrium values. Examples of this are: maximising consumption given a fixed budget, maximising output given limited resources, maximising employment of labour and capital given respective wage and rental rates. A discussion of elasticity is also well covered using calculus. These are some of the topics covered extensively in intermediate microeconomics and a knowledge of calculus would be a useful resource. However, there is neither the space nor expertise to cover this topic in the survival kit. The following are some references where a clear and comprehensible discussion can be found: Black, J. & Bradley, J.F. (1973). Essential Mathematics for Economists, John Wiley & Sons, Sydney. Stephen, G. (1972). Mathematical Methods for Economists, Gra-mills Publishing Ltd, London. Kennedy, G. (1982). Mathematics for Innumerate Economists, Duckworth, London. OBrien, D.T., Lewis, D.E. & Guest, J.F. (1989). Mathematics for Business and Economics, Harcourt Brace Jovanovich Group, Marrickville.
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Pearson, J.M. (1982). Mathematics for Economists: A First Course, Longman, New York. Thomas, R.L. (1989). Using Mathematics in Economics, Longman, London. Weintraub, E.R. (1982). Mathematics for Economists: An Integrated Approach, Cambridge University Press, Melbourne.

References
Chiang, Alpha C. (1984). Fundamental Methods of Mathematical Economics, McGraw-Hill Book Company, Sydney. Kennedy, G. (1982). Mathematics for Innumerate Economists, Duckworth, London. Thomas, R.L. (1989). Using Mathematics in Economics, Longman, London.

Some commonly used notations

means change in. means the sum of so for example

i=1

xi means the sum of the values of x from x1 to xn i.e. x1 + x2 + x3 + x4 + ....xn

< > < >

reads less than reads greater than reads less than or equal to reads equal to or greater than : : : reads a is less than 1 reads a is equal to or greater than 1 reads a is greater than o but less than 1

Examples
a<1 a>1 o<a<1

Approach to dialogue with a diagram

As indicated previously, the economics delivered at Gippsland concentrates heavily upon geometry and language. This two-pronged attack requires students to enhance their observational skills in a disciplined systematic approach to all the diagrams presented in the economic tool kit. Students must continually remind themselves that: A graph is a visual presentation of a relationship. It is absolutely crucial that you learn to relate to the graphs and models presented in economics. Notice also that figures or numbers are not necessary in order to understand the basic relationship in introductory economics.
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Observe the following:

Vertical Axis

Value Increasing

SPACE

Origin

0 Value Increasing

Horizontal Axis

The best method of coming to terms with graphs, diagrams and models is simply to talk to them, to assume they have a personality. NO, IM NOT JOKING !!!! If you talk to the graph, ask it questions, you will find IT WILL ANSWER BACK, exactly the same as any person you may have a conversation with.

Dialogue with a diagram (Example 1)

On occasions numbers may be used, even in an absurd manner to illustrate a relationship.

Vertical Axis

Cans of beer per day

d 12 c

6 a 3

Horizontal Axis

Origin

25

50

75

100

125 150 175

Waistline (cms)

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If you refer back to the previous diagram, you will find that it merely sets out the skeleton framework within which we will work. We notice: 1. 2. This diagram has a vertical axis and a horizontal axis and that zero 0 is written at the origin. BUT IT IS CRUCIAL that we actually READ what is written on EACH AXIS. The relationship we are going to look at will be between these two VARIABLES.

NOW WE BEGIN ASKING THE DIAGRAM QUESTIONS. First: What are the two variables? The variable on the vertical axis is cans of beer per day and the waistline measured in centimetres is the variable on the horizontal axis. Obviously the relationship is between cans of beer consumed and the waistline. AND IGNORING ALL OTHER FACTORS, WE ARE JUST CONCERNED WITH THESE TWO. Second: What is the general relationship between beer consumed and the waistline? The diagram answers back that to begin with and up to point a the quantity of beer consumed has no relationship whatsoever with the waistline. BUT from a to b to c to d increases in beer consumption definitely adds to the waistline. The diagram answers our query by showing us that as we move upwards (into diagram space) we are also moving outwards, into diagram space. BUT the diagram tells us something else TOO. After a certain point, d there is no relationship between beer and increasing waistline. THIS IS ONLY LOOKING AT THE GENERAL OVERALL RELATIONSHIP.

The specific relationships illustrated

1. Ask the diagram. What is the waistline when six cans of beer are consumed per day? REPLY: 100 centimetres. 2. Ask the diagram. The waistline is 125 centimetres; how many cans of beer per day am I consuming? REPLY: 9 cans of beer.

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3.

Ask the diagram. What will my waistline be if I consume 12 cans of beer per day? REPLY: It could be anything from point d 125 centimetres onwards.

4.

Ask the diagram. What else can you tell me about the consumption of beer and the waistline? REPLY: If you increase your consumption of beer by three cans per day after an initial intake of three cans per day, then, for each additional three cans of beer intake your waistline will increase by 25 centimetres. There appears to be a POSITIVE relationship between the consumption of beer, within the range of 3-12 cans and the incidence of increasing waistline from 75-100 centimetres.

REMEMBER THIS IS PURELY HYPOTHETICAL AND IS AN EXERCISE IN DIALOGUE WITH A DIAGRAM. NOT A LESSON IN ECONOMICS. The dialogue with a diagram approach has been used on the Gippsland campus for several years in an attempt to overcome the difficulties encountered by students when dealing with abstract concepts. This approach, once thoroughly practised becomes absolutely natural and almost instinctive, and is easily transferred to the most complex diagrams/models covered in the upper-level units. According to the experience of past graduates this simple technique is highly effective in developing the necessary observational and analytical skills essential in economics at any level. Let us practice on a simple first-level diagram.

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The milk and whisky industries

Sequence of events
MILK INDUSTRY A. Reduced demand for milk (SHIFT) of demand curve C. Milk sales decline E. Supply of milk unaltered G. Price of milk declines, falling prices reduces profit I. Producers reduce output WHISKY INDUSTRY B. Increased demand for whisky (SHIFT) of demand curve D. Whisky sales increase F. Inventories running low H. Price rises to ration supply, with rising prices profits increase J. Producers increase output

K. Obviously with price, profit and K. As the price, profit and output output falling in the milk is rising in the whisky industry, industry, producers will be the displaced resources of the leaving the industry and milk industry will be taken up entering the whisky industry by the whisky industry The following diagrams illustrate the text of the reallocation of resources from the milk industry to the whisky industry as per points A K. MILK INDUSTRY WHISKY INDUSTRY

Profits in both industries equal position before change of preferences

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The readjustment of resource allocation will continue until the profits being made in the two industries have again become equal; equalling their opportunity cost. Displaced resources from the milk industry shifting to the whisky industry might be the following: 1. 2. Retrenched workers Corn used to produce whisky instead of feeding milk-producing cows

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3. 4.

The least productive cows, processed to produce glue used to paste on the whisky labels Banks investment avenue loans to distilleries instead of farmers.

IMPORTANT Ensure that you fully understand the sequence of events that led to this reallocation of resources.
A change in demand causes prices to alter, which is reflected in the profits made by sellers, who then change their production decisions. Profits are the key to adjustments in a market economy. 5

For overseas students

Preamble
This section is especially prepared for overseas students studying outside Australia, but it may also be of assistance for international students who are studying on campus and for whom English is a second language. Although international students are aware that a certain standard of English is necessary to be able to study at an Australian university, there are many international students who have difficulty in meeting the required standard of English expression necessary to be granted a university degree. The important issue involved with language difficulties for international students is one of communicating to academics, various individuals, corporate institutions and professional bodies, exactly what knowledge they have acquired. International students study in Australia to complete an Australian degree which, for the present, indicates to prospective employers and professional bodies that the students can be expected to be proficient in English. Therefore, it is our preoccupation as academics that students graduating with an Australian degree must have solid communication skills in English, regardless of the students area of origin or possible future final destination. Problems with English ultimately lead to other difficulties for students studying for an Australian degree. Some become frustrated, losing motivation and seeking to avoid the problem by neglecting their studies. Others turn their frustration toward staff and other students, becoming isolated from valuable contact and language practice. On rare occasions some begin imagining themselves to be victimised by all, even their fellow international students.

A detailed account of this adjustment mechanism without the diagrams may be found on pp.18-22, Part 1 of Fusfeld, D.F. (1976). Economics, 2nd edn, Heath and Co, USA, 1976. 21

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Education difficulties and suggested solutions

Reading
An expectation that the prescribed text can and will be understood at a single reading instead of being prepared to re-read several times. When studying a new discipline or any unfamiliar area it is only reasonable to assume that it will take several attempts to come to grips with the new concepts. The problem is doubly difficult when you are working with a second language which has such inconsistencies as English, particularly in spelling and pronunciation.

Suggested solution
Ensure that all the unit material is read completely at least two or three times. The reading requirement in university units, but particularly economics, should be approached by completing a single small task, one at a time. For instance, you should pay attention to the objectives of the particular chapter. These are located at the beginning of most well-structured textbooks. Make sure you understand what you are broadly supposed to get from completing the reading of the chapter. In addition, the overview of the chapter will most likely place the detail of the chapter into context to promote student understanding. Read this two, three or even four times. Next, flick through the chapter pages to see the length of the first content covered. If it is reasonably short, then make your first objective, understanding this section. Start reading, but only cover around four or five paragraphs each time. Read them once, then return to the first paragraph and re-read. Can you identify the main thought contained in the first paragraph, then the second paragraph and so on until you have covered the first five. Return to the beginning but now write out IN YOUR OWN WORDS the main thought. There should only be one contained in each paragraph. List all five thoughts in sentences and also in point form one after another. Now read the five or so main thoughts. Ask yourself, do these sentences make sense? Do the thoughts follow in a logical sequence from one to another? Is the whole thing making sense? The answer should be yes. Continue working with your text in this manner until you have completed the chapter. Now return to the objectives, do your sentences relate to the objectives indicated. They should, and if they do, you are now understanding the content and putting it in your own words. Use the approach over several chapters and check the outcome as each is completed. I can guarantee that after a period of time, the task becomes so much easier. You will find that as you progress you will not need to take such a methodical approach because you will mentally automatically adopt this technique whenever you pick up any strange or unfamiliar material.

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THE BONUS: These main thoughts will now assist you in using your own words when answering your assignment questions in written form. WARNING: Dont revert to your old habits as soon as you commence the official assignment work.

Written work
An over-reliance on direct quotations from the prescribed textbooks to answer assignment questions. Assignments become a reproduction of the text which merely indicates that the student knows where to find the information but does not necessarily understand the information given. Even when the question asks for an application of the theory to a particular problem, the textbook is quoted at considerable length rather than the student actually answering the question asked and using the textbook theory to explain the process.

Suggested solution
As indicated above, the overuse of direct quotations from the text is a symptom of not fully understanding the written word. The technique given previously will assist your understanding as well as giving practice in putting important concepts into your own language structure. There are times when direct quotations are essential or provide clarity to the answer given, but, these instances should not be so common as to have a quotation contained in every paragraph, particularly when the prescribed textbook has been used as the only reference source. Use the above technique to improve the skill of putting things in your own words. It is important to make a positive comment here. International students usually keep very close to the prescribed textbook material. In doing so they usually cover the theory as given in the textbook well, and very seldom introduce totally irrelevant material into their assignment work. This is a positive element upon which most can build to acquire the other necessary skills. If you make the effort to put answers into your own words, remember that international students always perform very well because they address the central issue of the question rather than padding the answer.

Making use of existing strengths

Economics can be a descriptive subject telling what has happened; an analytical discipline telling why something has or will happen; or a combination of both. By the very nature of the material used in introductory economics, initially the subject must be descriptive, where students describe how models and diagrams are constructed. However, once the basic tools are placed in the

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hands of the student, it is the intention that the economics delivered in Introductory Microeconomics and other foundation units will be mostly analytical in nature. In other words, applied to problems identified in society. This requires that as well as being able to describe the models, you must be able to analyse the impact that various changes in certain variables will have on the outcomes addressed within the models. These impacts can only be analysed if you understand the theory behind the model and can manipulate the model to demonstrate the possible impacts from hypothetical as well as real-world occurrences. This skill requires considerable understanding of the theory on the part of the student, as well as the language skills to communicate that understanding.

Using equations
It is evident that international students usually have very good mathematical skills, but are not using these skills to assist the development of their analytical skills using language. I would make the following suggestions to use those mathematical skills to improve the English language skills. Note the earlier comments of Alfred Marshall regarding the use of mathematics as a shorthand communication tool in place of language. Practise writing out a full explanation of equations in English as clearly and precisely as possible. As an example: Qd = f(P, PS, T, Y, W). This would translate into the sentence: The quantity demanded of this or any particular product will depend upon or is a function of such factors as the price of the product, the price of substitute products, the tastes of consumers, the current income of consumers and the accumulated wealth of consumers. Note: The equation given is for illustrative purposes only and may not be exactly accurate. It is easy to see why the equation is more precise but it does not give the necessary practice of the English language. However, in many instances I would expect you to use the equation in an assignment and to demonstrate your understanding of these factors with the application of the theory to the model.

Using diagrams
Pay particular attention to the previous section where the technique for Dialogue with a diagram is described in detail. Not only is this technique helpful in assisting students to read and understand the theory illustrated by the diagram, it is an invaluable exercise for developing language skills. Imagine that you have an economic model in front of you and your English teacher asks you to write everything you can OBSERVE about it to form an essay. What might you write and how might you write it? Remember, it must be clear and as precise as possible, and at this stage the number of words does not matter as long as the reader can understand, or visualise in their minds eye, what you are trying to communicate. Obviously it would be much easier to draw it, but that is not the object of the exercise.

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This exercise can also be done orally with friends, rather than in writing. It is especially helpful when you are revising for examinations. The title of the diagram: A normal demand curve of an individual consumer for pineapples. The reader should visualise firstly a vertical line, in terms of compass points running from north to south which, for the purposes of the model, is known as the vertical axis. This vertical axis is joined at the bottom of the line to a horizontal line, in terms of a compass running from west to east which is drawn from the conjunction moving from the left to the right and known as the horizontal axis. At the point of joining which happens to be a right angle, the value of both of the variables on either axis will be zero and this is indicated on the outside of the junction known as the origin. The vertical axis will be labelled Price per pineapple with the values in dollars from zero at the origin and moving in an upwards direction the values increase as we move further away from the origin. In this particular example the price range for pineapples, drawn to scale, is from the lowest price of $1.00 through $1.50, $2.00, $2.50, $3.00, $3.50 to a maximum price of $4.00 each. The horizontal axis will be labelled quantity demanded and the values drawn to scale also increase as we move further away from the origin. These are the two variables with which we are concerned for the time being and which ceteris paribus (all other things remaining constant) will illustrate what is commonly known as the law of demand. The law of demand illustrates an inverse relationship between Price and the Quantity Demanded which states that as Price increases the Quantity Demanded will decrease and if the Price decreases the Quantity Demanded will increase. This means that the demand curve will slope downwards to the right, with movements along the curve illustrating the law of demand. As can be demonstrated a change in the price of pineapples in an upward direction, an increase in price, means the quantity of pineapples demanded will fall. The quantity demanded will therefore be an amount closer to the origin than previously. Note: The above is not meant to be a perfect explanation of economic demand theory but is illustrative of the way that an explanation of a model can assist the language skills of any student. I would suggest that international students use this technique to gradually lower the reliance upon direct quotations from the prescribed text. It should also be clear from the above example, that if you understand the construction of the model using the theoretical concepts, there is no need to try to memorise detail in order to write an instructive and informative essay about any particular diagram. THE DIAGRAM ITSELF IS YOUR ESSAY PLAN; all you need to do is to follow the construction/drawing sequence, discussing it in theoretical terms.

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Oral work
The recitation of definitions of economic principles directly from the prescribed text. This occurs without any indication that the student actually understands what the particular definition means. The lack of understanding is usually indicated with the student not being able to illustrate the economic concept with examples; or if examples are given they are direct from the textbook rather than from the area of your own experience. I usually demonstrate to the students who attend on campus that I can teach very young children to recite the definition of, say, a demand curve, but clearly the children do not understand the meaning behind the definition. Often the same principle applies to tertiary students. Students working in pairs or groups can assist each other by talking themselves through the same type of exercise as given previously for the demand for pineapples diagram. Instead of written work the exercise can be an oral one with fellow students listening and questioning those delivering the definition, theory or the description of the model. All students present may then offer improvements in the responses given.

Outcome rather than process

On many occasions there is only concern with obtaining the right answer. The educational concern, however, is with understanding the process of obtaining or arriving at the correct answer. In many units, the process of reasoning toward the ultimate answer is of far greater value than the attainment of the right answer. There are often answers to economic questions that are absolutely right or wrong but it is important that you are aware of the manner in which the particular answer was obtained. If the reasoning is not given, the marker may find it extremely difficult to identify where you are experiencing difficulty. There are times when there may be more than one correct answer to the problem given. Whether the answer is right or wrong will depend upon the thinking that you use. The explanation of the reasoning behind the answer will justify whether the answer is right or wrong. The decision to approach a problem from a particular standpoint will therefore determine the particular answer given. In other words, the correct answer is often dependent upon the process followed by the student rather than the actual final answer given.

Assessment
An expectation that students will or should always make the highest grades. Often students are bitterly disappointed and appear confused over the assessment result even when the reasons for the lower grade are explained and the necessary adjustments which need to be made to obtain the higher one are given. It is admirable that students strive for and wish to attain the highest possible grades, but unrealistic to expect that every student will reach such a standard. If every student managed to reach such a standard I would be happy to reward them with the highest grade.

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In much earlier times model answers were given to students to assist their understanding of what constituted a poor, reasonable and excellent answer. However, the exercise was self-defeating. Students ultimately endeavoured to reproduce the excellent answer to any question which remotely resembled the original question instead of answering the question being asked. The practice of any type of model answer was quickly discarded. Students are recommended to closely examine the comments written on their assignments and to pay attention to the attached assignment assessment sheet which clearly indicates, poor, satisfactory, good and excellent answers to all parts of the specific questions examined. Taken together, this instrument and the comments are a good guide to what is required in order to attain a high grade and also indicates where additional work will be necessary.

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Sample Examination Questions

Q Use a production possibility frontier diagram to explain the fundamental relationship between the economic concepts of scarcity, choice and opportunity cost. (5 marks) Q (a) Using a market supply and demand diagram, show the likely effect of the current drought conditions on the equilibrium price and quantity of the beef market. (b) Explain fully the process of adjustment of the market to its new equilibrium. (5 marks) Q Some years ago, the Australian government implemented a floor price policy to support wool producers. The Australian Wool Board purchased the wool clip from farmers at a set price above that offered in the market place. They undertook to store the wool until the world market price recovered. For some considerable time following this government policy the world demand for wool declined, leaving the Australian Wool Board with a large stockpile of wool. (a) Draw and fully label a simple demand and supply diagram to illustrate the wool floor price. (b) Explain why government intervention in the wool market was unlikely to be successful. (10 marks) Q The proprietor of a large clothing store wishes to reduce the current stock of summer clothing. He asks your advice about reducing all prices by 20%. He insists that he wishes to at least maintain his current revenue level. Using the concept of price elasticity of demand what would be your advice to him. Knowing that pictures make for easy understanding you illustrate your suggestion with a diagram. (10 marks) Q Use an example to carefully explain the relationship between the concept of diminishing marginal product and increasing marginal costs.
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(10 marks)

Carefully reproduce the above diagram in your examination booklet. (a) Show the impact of a dramatic increase in tax on the market for cigarettes. (b) Show the areas of consumer surplus and producer surplus after the tax has been applied. (c) Predict the impact of the increased tax on government revenue. (d) Explain the impact of such a large tax on societys overall welfare. (10 marks)

Research is published which suggests that consumption of Product X has substantial health benefits. Using a supply and demand diagram show the likely effect of this information on the equilibrium price and quantity of the product. Explain the process of adjustment of the market to its new equilibrium. (10 marks)

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Carefully redraw the following diagram in your answer book.

The diagram relates to a firm which is a monopoly in the sale of its product. (a) On the diagram show: (i) the price and output for the monopolist to maximise profit

(ii) the monopolists profit (iii) the consumer surplus which results under monopoly (iv) the price and output which would have occurred if the diagram referred to an industry which was perfectly competitive. (b) Referring to your diagram explain carefully the costs of monopoly to the society. (10 marks)

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