SAMPLE. Table of Contents Higher Altitudes. in Economics. Unit 1: Introduction Chapter 1: What is Economics?

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2 HIGHER ALTITUDES IN ECONOMICS Table of Contents Higher Altitudes in Economics Unit 1: Introduction Chapter 1: What is Economics? Lesson 1 Lesson 2 Lesson 3 Lesson 4 Lesson 5 Decisions in the Face of Scarcity Objectives: Students will be able to define and use the terms economics and scarcity, explain why is that humans must make decisions, evaluate their own daily life experiences and identify the myriad of decisions that are made every day, and describe these decisions in terms of scarcity.. Costs and Benefits Objective: Students will be able to define and use the terms: costs, benefits, opportunity cost and rational. Students will be able to evaluate most everyday choices and describe the costs and benefits of those choices, describe most everyday human action as a weighing of costs and benefits, evaluate certain decisions that appear on the surface to be irrational and reconcile them with an economist s definition of rational behavior; evaluate certain decisions that appear on the surface to be irrational and reconcile them with an economists definition of rational behavior and identify and object to some misrepresentations economists mean when they assume that people are rational. Trade-offs Objective: Students will be able to define and use the terms trade-off, marginal cost and marginal benefit; they will be able to discuss everyday decisions in terms of trade-offs, and give examples of what it means to think at the margin Voluntary Exchange Objectives: Students will be able to define and use the terms comparative advantage, absolute advantage and terms of trade; explain why all voluntary exchange is mutually beneficial in the absence of fraud or coercion; criticize basic arguments against free trade, determine the comparative advantage and the absolute advantage in a simple example of proposed voluntary exchange, as well as identify a range for the terms of trade. Chapter Review: What is Economics, Anyway? Objectives: Students will be able to summarize decision-making behavior as economists see it; distinguish some common misrepresentations of economic thinking and correct them; and students will be assessed on their knowledge of the material.

3 HIGHER ALTITUDES IN ECONOMICS Chapter Two: How do Economists Express Themselves, Anyway? Lesson 6 Lesson 7 Lesson 8 Lesson 9 Lesson 10 Unit Two: The Language of Economics Objectives: Students will be able to define and use the terms microeconomics, macroeconomics, normative analysis, positive analysis and equilibrium, categorize subjects that fall within those terms and evaluate statements as being positive or normative in nature. From Words to Math to Pictures Objective: Students will be able to define and use the terms: slope and X/Y Coordinate plane, interpreted ideas expressed in words, mathematically and graphically; the student will be able to translate and idea from one method of expression to another, and derive the equation for a line given two points on the live Assumptions and Models Objective: Students will be able to define primary terms, justify the Economists use of models, distinguish between good and bad models, use circular flow diagrams and understand the difference between household activities and those activities taken by firms. Production Possibilities Curve Objective: Students will be able to define and use applicable terms, distinguish between production choices that are possible and those that are not, and show inefficient production on the production possibilities curve. Chapter Review: How do Economists Express Themselves, Anyway? Objective: Students will be able to summarize the way economists present economic theories, identify unhelpful or incomplete representations of economic ideas and correct them, and will be assessed on their knowledge of the material. Microeconomics Chapter Three: What is Microeconomics? Lesson 11 Lesson 12 Lesson 13 Lesson 14 Basic Assumptions of Microeconomics Objective: Students will learn the basic assumptions of microeconomics, know defined terms, identify variables as exogenous or endogenous and explain economists' assumptions The First Tool: Constrained Optimization Objective: Students will understand defined terms, construct thought experiments in the style of constrained optimization and describe their own familiar behaviors in terms of constrained optimization. The Second Tool: Marginal Analysis Objective: Students will be able to define and use applicable terms, explain why choosing a level of activity that equates marginal cost and marginal revenue maximizes benefits net of costs, and show equating marginal cost and marginal benefit as the intersection between a marginal cost curve and a marginal benefit curve. The Third Tool: Comparative Statistics Objective: Students will be able to define and use applicable terms, explain how chosen valuables of choice variables can be thought of and expressed as functions of all exogenous variables and also give examples of changes in exogenous variables.

4 HIGHER ALTITUDES IN ECONOMICS Lesson 15 Chapter Review: What is Microeconomics, Anyway? Objective: Students will be able to summarize the way basic assumptions and tools of microeconomic and will be assessed on their knowledge of the material. Chapter Four: Consumer Choice Theory and Demand Lesson 16 The Consumer's Problem: Utility Maximization Objective: In this lesson, students will learn how economists apply the tools discussed in previous lessons to the activities of consumers. Students will learn about utility, an ordinal measure of satisfaction that diminishes on the margin. Students will learn the rules that economists assume govern consumer preferences: notably that preferences are complete, more is preferred to less, preferences are transitive, and marginal utility usually diminishes. Students will begin to use a two-good model, where a consumer chooses the combination of two goods that provides the most utility. Lesson 17 The Budget Line Objective: In this lesson, students will learn about the next part of the consumers utility maximization problem: the constraint. Students will learn that, out of all of the ways that consumers may be constrained, the most important constraint facing consumers is income. Students will then return to the two-good model and learn how to represent this constraint graphically with the budget line. Students will also be able to show graphically how changes in income or prices shift the budget line. Lesson 18 Solving the Utility Maximization Problem Objective: In this lesson, students will learn a simplified (non-calculus) approach to understanding the solution to the consumer s utility maximization problem. Students will learn about bang for the buck, which is equal to the additional utility provided by another unit of a good divided by its price. The solution to a utility maximization problem involves choosing all goods in quantities that cause the bang for the buck to be equal among all goods chosen. Finally, students will consider how a change in a price affects the bang for the buck and causes the consumer to change his or her chosen bundle. Lesson 19 The Demand Curve Objective: In this lesson, students will synthesize what has been covered in the previous few lessons and develop one of the most essential models in economics: the demand curve. Lesson 20 Chapter Review: Consumer Choice Theory and Demand Objective: In this lesson, students will review and synthesize material from the four previous lessons. Assessment of the learning from this chapter, in the form of several problems and questions, will also take place. Warnings about incorrect applications or inferences from the previous chapter are advanced. Students will be able to summarize consumer choice theory and how it leads to the development of the demand curve.

5 HIGHER ALTITUDES IN ECONOMICS Chapter Five: Production and Supply Lesson 21 The Firm's Problem: Profit Maximization Objective: In this lesson, students will be introduced to the firm s problem of profit maximization. Students will learn first about the two components of the definition of profit: revenue and cost, with an emphasis on a complete economic understanding of total cost. Lesson 22 Total Cost and Average Cost Objective: In this lesson, students will learn more about several definitions of cost that are important to economics. First students will learn the difference between fixed and variable costs and will be able to distinguish whether a given cost is fixed or variable. The definitions of fixed and variable costs lead directly into an understanding of the short run, which is the period of time over which some costs can be fixed, and the long run, which is the period of time over which all costs must be variable. Finally, students will learn about the average measures of fixed, variable and total cost, and how to interpret these measures. Lesson 23 Marginal Cost and Marginal Revenue Objective: In this lesson, students will learn the final and most important measure of a firm s production costs: marginal cost. This is the additional cost of making the next unit of output (or, equivalently, the additional cost from making the last unit of output). Students will learn that economists believe that the costs of increasing output eventually rise with the level of output, so that producing one more unit becomes more and more expensive. Students will learn another way of expressing this same idea: resources that are used to make output become less and less productive on the margin and more and more of the resources are employed. Finally, students will learn the meaning of the phrase marginal revenue and its application in a simple model where the firm just charges the going market price for its output. Lesson 24 The Supply Curve Objective: In this lesson, students will consider how the profit-maximizing decision (solved in the previous lesson) changes if price changes and will use this result to develop the second half of the most famous model in economics: supply. The determinants of supply will also be discussed. Lesson 25 Chapter Review: Production and Supply Objective: In this lesson, students will review and synthesize material from the four previous lessons. Assessment of the learning from this chapter, in the form of several problems and questions, will also take place. Warnings about incorrect applications or inferences from the previous chapter are advanced. Students will be able to summarize production theory and how it leads to the development of the supply curve.

6 HIGHER ALTITUDES IN ECONOMICS Chapter Six: Elasticities and Equilibrium Lesson 26 Price Elasticity on Demand Objective: In this lesson, students will learn what is meant by the term elasticity and why the concept is important in economics. Students will then begin to understand the demand curve in more detail by learning about the most-often used elasticity: price elasticity of demand. Students will learn how to calculate a price elasticity of demand given two points on any demand curve, as well as a simpler method of calculating the price elasticity of demand at any one point on a straight-line demand curve. Students will also discuss the characteristics of goods that affect price elasticities. Lesson 27 What is Economics? Objective: In this lesson, students will learn about two other measures of elasticity related to demand: cross-price elasticity of demand and income elasticity of demand. This lesson will not focus so much on calculating these elasticities, but rather on interpreting the values. In doing so, students will learn that the sign of a cross-price elasticity determines whether two goods are complements or substitutes and that the sign of an income elasticity determines whether a good is normal or inferior. Lesson 28 Price Elasticity of Supply Objective: In this lesson, students will turn their attention to supply, and discuss the price elasticity of supply. Much of this lesson will mirror Lesson #26. Students will learn how to calculate the price elasticity of supply and to interpret the result. Students will also learn some of the characteristics of goods that determine price elasticity of supply. Lesson 29 Supply and Demand Equilibrium Objective: In this lesson, students will finally combine supply and demand to see how decentralized market decisions lead to an equilibrium price and quantity that clears the market. Students will learn what defines an equilibrium and show how that definition applies to the supply and demand market equilibrium. In so doing, students will learn that a price higher than the market-clearing price causes a surplus, which leads to downward pressure on prices; a price lower than the market-clearing price causes a shortage, which leads to upward pressure on prices. Lesson 30 Chapter Review: Elasticities and Equilibrium Objective: In this lesson, students will review and synthesize material from the four previous lessons. Assessment of the learning from this chapter, in the form of several problems and questions, will also take place. Warnings about incorrect applications or inferences from the previous chapter are advanced. Students will be able to summarize the different types of elasticity discussed in the chapter, as well as the supply and demand equilibrium.

7 HIGHER ALTITUDES IN ECONOMICS Chapter Seven: Welfare Economics Lesson 31 Welfare for Buyers and Sellers Objective: In this lesson, students will begin to learn about welfare economics, which attempts to discuss the benefits to participating in market activity that accrue to buyers and sellers in the market. Welfare economics is often used in policy analysis to compare the welfare gains and losses associated with different market outcomes. Students will be able to describe what buyers and sellers each are forced to give up in order to participate in the market and to discuss the threshold that determines whether they will or will not participate. For buyers, this threshold is a willingness to pay, and for sellers, this threshold is a willingness to accept. Lesson 32 Consumer Surplus Objective: In this lesson, students will learn about consumer surplus, the sum of the differences between willingness to pay and price for every consumer in a market. Students will also learn how to identify this area graphically on a supply and demand drawing, as the area below the demand curve and above the price. In doing so, students will also identify geometric areas of total value (everything under the demand curve) and total expenditure (everything under the price). Lesson 33 Producer Surplus Objective: In this lesson, students will learn about producer surplus, which is the sum of the differences between marginal cost and price for all of the producers in a market. Students will also learn how to identify this area graphically on a supply and demand drawing as the area between the supply curve and the price. In doing so, students will also learn how to identify the area of total revenue (underneath the price) and the area of total variable cost (underneath the supply curve). Students will earn about the relationship between producer surplus and profit. Lesson 34 The Efficiency of the Market Objective: In this lesson, students will analyze the free market equilibrium solution in terms of total surplus, the sum of consumer and producer surplus. Students will discover two facts: the market equilibrium maximizes the sum of consumer and producer surplus, and, at the market equilibrium, buyers or sellers can only be made better off at the expense of one another. Students will learn that this concept, called Pareto Efficiency, is a very important requirement for an outcome to be considered efficient. Lesson 35 Chapter Review Objective: In this lesson, students will review and synthesize material from the four previous lessons. Assessment of the learning from this chapter, in the form of several problems and questions, will also take place. Warnings about incorrect applications or inferences from the previous chapter are advanced. Students will be able to summarize the concepts of consumer and producer surplus, as well as welfare economics in general.

8 HIGHER ALTITUDES IN ECONOMICS Lesson 36 Taxes and Subsidies Objective: In this lesson, students will learn about two common forms of government intervention: subsidies and taxes. Subsidies are used to encourage market activity and taxes are used to discourage market activity. Students will learn about the difference between the legal structure of a tax or subsidy and the actual affect of a tax or subsidy. Students will also learn how to show a tax or subsidy graphically by using a tax wedge or a subsidy wedge. Students will learn about the consequences of interfering with the market equilibrium: a reduction in total surplus known as deadweight loss. Lesson 37 Price Controls Objective: In this lesson, students will about another set of government interactions: price controls. Students will learn the difference between setting a maximum price and setting a minimum price. Students will be able to explain and show graphically the consequence of setting price controls: deadweight loss. Students will also be able to distinguish between the effects of a tax or subsidy, in which case the market still clears, and the effects of a price control, where the market does not clear. Lesson 38 Externalities Objective: In this lesson, students will learn about externalizations, which are costs or benefits that fall on people outside of the market where transactions are made. Students will learn that market does not consider these costs or benefits because they do not fall on the decision-makers that help the market to work. Externalities are often used as a justification for government intervention into market outcomes, but students will learn how costless bargaining can allow individuals to solve problems of externalities on their own. Students will learn how taxes and subsidies can be used to correct the problems of negative and positive externalities respectively. Lesson 39 Lesson 40 Lesson 41 Public Goods and Common Resources Objective: In this lesson, students will learn about another set of arguments in favor of government involvement in markets. Students will learn about public goods and common resources, two classes of goods that may not be provided by private markets. Students will learn how to identify and classify goods as public goods or common resources by using the characteristics of excludability and rivalry. Chapter Review: Regulating the Market Objective: In this lesson, students will review and synthesize material from the four previous lessons. Assessment of the learning from this chapter, in the form of several problems and questions, will also take place. Warnings about incorrect applications or inferences from the previous chapter are advanced. Students will be able to summarize the justifications for government intervention into the market and common forms of government intervention. Perfect Competition Objective: In this lesson, students will learn the simplest and most important model of a market: a perfectly competitive market. Although the assumptions of this simple market model (which students will learn in this lesson) are not often realized in the real world, students will learn why it is a helpful and important model. Students will learn the very important outcomes of a perfectly competitive market: zero economic profit, and price equal to marginal cost.

9 HIGHER ALTITUDES IN ECONOMICS Lesson 42 What is a Monopoly? Objective: In this lesson, students will learn about another simple market structure: a monopoly. Students will learn that, like perfect competition, the assumptions of a monopoly are not ever completely met in the real world, but it is a valuable model nonetheless. Students will be able to discuss the root cause of monopoly, barriers to entry, and the different forms that barriers to entry can take. Students will learn how to construct a tabular and graphical description of a monopoly market. Lesson 43 The Monopoly's Solution Objective: In this lesson, students will learn about how a monopolist chooses price and quantity. Students will be able to show this result graphically. Students will be able to explain why a monopoly market produces less output ceteris paribus than does a perfectly competitive market, and the price charged by a monopolist is higher than marginal cost. Students will be able to describe the deadweight loss caused by a monopoly and show the deadweight loss graphically. Lesson 44 Lesson 45 Lesson 46 Lesson 47 Other Market Types Objective: In this lesson, students will learn about two other market types. These two market types are analytically more complicated, but also more realistic. Students will be able to describe the properties of these two market types as well as the outcomes. Students will be able to compare these market types to the two simpler market types of perfect competition and monopoly. Students will be able to identify markets as belonging to either of these categories. Chapter Review: Competition vs. Monopoly Objective: In this lesson, students will review and synthesize material from the four previous lessons. Assessment of the learning from this chapter, in the form of several problems and questions, will also take place. Warnings about incorrect applications or inferences from the previous chapter are advanced. Students will be able to summarize the differences and similarities between the different market types. The Microeconomics Foundations of Macroeconomics Objective: In this lesson, students will learn that macroeconomics is the study of economy-wide phenomena, but that it must be based on microeconomic principles. Only by knowing how individual consumers and producers behave can we understand how an entire economy works. Students will learn about the roles of each of the four participants in macroeconomic models: consumers, firms, government and foreigners, as well as what basic microeconomic principles guide their actions. Measuring Output through Production Objective: In this lesson, students will learn that the most important variable in macroeconomics is GDP, gross domestic product, and what it is. Students will learn to distinguish this from gross national product, which is similar. Students will also be introduced to the first of three ways of measuring, or understanding, gross domestic product, which is to measure it through the value of production. When measuring GDP this way, it is important that only value added at each stage of production be measured, otherwise some goods will be counted multiple times.

10 HIGHER ALTITUDES IN ECONOMICS Lesson 48 Measuring Output through Income Objective: In this lesson, students will consider that in the process of measuring GDP by production in the previous lesson, they were essentially just summing the money paid to various resources, assemblers and entrepreneurs. The value added at each stage in production is equal to the income paid to the resource that added the value. Therefore, measuring income can provide the same basic result as does measuring production. Students will learn the details of which incomes to measure to achieve the appropriate result. Lesson 49 Measuring Output through Spending Objective: In this lesson, students will be introduced to an important macroeconomic identity that spending equals income. Students will learn about the spending of each of the four main macroeconomic participants: consumption (spending by consumers), investment (spending by firms), government spending, and net exports (spending by foreigners). Students will learn details about how to appropriately measure spending so that double counting does not occur and so that an accurate measure of GDP is attained. Lesson 50 Lesson 51 What is Economics? Objective: In this lesson, students will review and synthesize material from the four previous lessons. Assessment of the learning from this chapter, in the form of several problems and questions, will also take place. Warnings about incorrect applications or inferences from the previous chapter are advanced. Students will be able to summarize the fundamentals of macroeconomics and the three approaches to measuring GDP. How to talk about GDP Objective: In this lesson, students will be introduced to the importance of measuring GDP over time and tracking its changes. GDP growth is often considered to be a worthwhile economic goal. In order to discuss changes in GDP more carefully, students will learn about real, or price adjusted, GDP and be able to distinguish it from nominal, or non-price-adjusted, GDP. Further, students will learn that per capita measures of GDP are sometimes appropriate when using GDP as a measure of economic well-being. Lesson 52 Potential GDP and Unemployment Objective: In this lesson, students will learn that despite the constant changes in the growth rate of GDP, GDP appears to generally follow an upward-sloping trend, despite variations above or below this trend. The long-run trend that GDP tends to follow is known as potential GDP and is related to what the economy, at full employment, is capable of producing. Sometimes GDP is above potential; other times it is below potential. Students will also learn about the three types of unemployment and which one is related to fluctuations in GDP away from potential.

11 HIGHER ALTITUDES IN ECONOMICS Lesson 53 The Business Cycle Objective: In this lesson, students will learn about the macroeconomic cycle of economic expansion and contraction often referred to as the business cycle. The business cycle begins with an expansionary period of growth, then reaches a peak when the growth slows and then stops, then goes through a recession when the economy shrinks, then hits the trough when the economic contraction slows and stops. The cycle begins again when the economy recovers from the recession by expanding again. The exact cause of the business cycle is the subject of much debate in macroeconomics. Some argue that an unregulated free market economy would not be subject to a business cycle, but that policy interferences cause the economy to need to self correct through the business cycle. Lesson 54 Lesson 55 Growth Accounting Objective: In this lesson, students will be introduced to the idea of growth accounting. If GDP is a measure of output, then GDP growth is an increase in the amount of output produced. Output is produced by people (labor) using tools (capital) to make things. The relationship between labor and capital is called technology. Therefore, if GDP is growing, it must be that at least one of three things has happened: the amount of labor has increased, the amount of capital has increased, or technology has improved. Growth accounting attempts to determine how much of GDP growth can be attributed to each of these three components. Chapter Review: Economic Growth Objective: In this lesson, students will review and synthesize material from the four previous lessons. Assessment of the learning from this chapter, in the form of several problems and questions, will also take place. Warnings about incorrect applications or inferences from the previous chapter are advanced. Students will be able to summarize the meaning of real and per capita GDP, as well as GDP growth and behavior in the short and long run. Lesson 56 The Three Uses of Money Objective: In this lesson, students will learn the definition of money as anything that provides any of three essential functions. First, money is a unit of account, which means that money can be used to describe that value, price or cost of something. In other words, it is a common language that we all understand. Secondly, money is a medium of exchange, which means that it is something that people are willing to accept in exchange for goods and services, knowing that they can turn around and exchange it again for other goods and services. Thirdly, money is a store of value, which means that it keeps its worth over time. Even though US currency is declared legal tender by the government, what actually gives it its value is the fact that people are all willing to accept it.

12 HIGHER ALTITUDES IN ECONOMICS Lesson 57 Lesson 58 Lesson 59 Lesson 60 Lesson 61 Measuring Money Objective: In this lesson, students will learn about the different ways that economists and government agencies measure the amount of money. First there is currency, which is paper money and coins. Then there is M1, which is currency in circulation (which doesn t count vault cash) plus checking deposits. This is the most-often used definition of money. M2 is M1 plus most savings deposits, money market accounts and small time deposits. Different definitions are used by different agencies and organizations for different purposes. Money Demand Objective: In this lesson, students will learn why people demand money: to make transactions. However, money can be used as an asset to store and save in order to make transactions in the future. The interest rate will be introduced and defined as the price of money. Students will learn that transaction demand for money depends on the number of transactions being made, and not on the interest rate, but asset demand does depend on the interest rate because as the interest rate increases, other assets become better tools for saving money and accumulating wealth. Because of this, the demand for money is negatively related to the interest rate (its price). With a constant (vertical) money supply and a downward-sloping money demand, an equilibrium interest rate can be found. Banking Basics Objective: In this lesson, students will be introduced to the basics of banking. Students will learn what reserves are and how a fractional reserve banking system can allow banks to create money. Chapter Review: Money & Banking Objective: In this lesson, students will review and synthesize material from the four previous lessons. Assessment of the learning from this chapter, in the form of several problems and questions, will also take place. Warnings about incorrect applications or inferences from the previous chapter are advanced. Students will be able to summarize the definition of money, the market for money and the basics of banking. Consumption Objective: In this lesson, students will be introduced to the consumption function, and along with that, the notion that at low levels of income, households spend more money on consumption than they earn, while at higher levels of income, households save some of their income. Income is the most important determinant of consumption. The relationship between income and consumption will lead students into learning about the average and marginal propensities to consume. Students will learn that some consumption does respond to changes in the interest rate, but the response is relatively slight.

13 HIGHER ALTITUDES IN ECONOMICS Lesson 62 Lesson 63 Investment, Government Spending and Net Exports Objective: In this lesson, students will learn about the other three components of aggregate spending: investment, government spending and net exports. Investment spending responds most seriously to changes in the interest rate, and students will learn that it is because as the interest rate rises, fewer investment opportunities are profitable ones. Investment does not respond very significantly to changes in current GDP, so in terms of the aggregate expenditures function, students will learn that investment is relatively stable, or pre-determined. Likewise, government spending does not respond to economic variables, so students will learn that it is pre-determined just like investment. Finally, students will learn that while net exports do respond slightly to changes in GDP, it only responds slightly, so we can consider this pre-determined also. The most important factor in determining net exports is the exchange rate, which is related to the interest rate. Spending Balance Objective: In this lesson, students will use the aggregate expenditures model, along with a 45-degree reference line, to find a spending balance. Students will also use a tabular example to explain the same spending balance. Lesson 64 The GDP Multiplier Objective: In this lesson, students will use the same tabular and graphical examples from the last lesson to observe what happens to equilibrium (spending balanced) GDP in response to changes in the spending behavior of the economic participants. Students will see that a small initial change leads to a bigger overall change due to changes in consumption behavior. Students will learn about the GDP multiplier and how to calculate it. Lesson 65 Lesson 66 Chapter Review: Aggregate Expenditures Objective: In this lesson, students will review and synthesize material from the four previous lessons. Assessment of the learning from this chapter, in the form of several problems and questions, will also take place. Warnings about incorrect applications or inferences from the previous chapter are advanced. Students will be able to summarize the different components of aggregate expenditures, how they respond to changes in GDP, and what is meant by a spending balance. Long Run Aggregate Supply Objective: In this lesson, students will learn about the supply side of the macroeconomy and will learn that, in the long run, the economy will always produce what it is capable of producing. In other words, students will learn that the long run level of GDP is equal to potential GDP. This will lead to the construction of a vertical long run aggregate supply curve. When combined with aggregate demand, we see that the level of output is determined by aggregate supply (the economy s ability to produce) and the price level is determined by aggregate demand (the economy s desire for output).

14 HIGHER ALTITUDES IN ECONOMICS Lesson 67 Lesson 68 Long Run Aggregate Supply Objective: In this lesson, students will learn about the supply side of the macroeconomy and will learn that, in the long run, the economy will always produce what it is capable of producing. In other words, students will learn that the long run level of GDP is equal to potential GDP. This will lead to the construction of a vertical long run aggregate supply curve. When combined with aggregate demand, we see that the level of output is determined by aggregate supply (the economy s ability to produce) and the price level is determined by aggregate demand (the economy s desire for output). Short Run Aggregate Supply Objective: In this lesson, students will learn that the stickiness of wages can lead to an upward-sloping short run aggregate supply curve. Students will learn that when prices rise but wages do not, firms are inspired to produce more output until wages eventually rise to catch up to prices; likewise, students will learn that when prices fall but wages do not, firms are discouraged from making output until wages fall again. This can cause short run deviations from potential GDP, but is consistent with the vertical long run aggregate supply curve, which assumes fully-flexible prices and wages. Lesson 69 The Business Cycle Revisited Objective: In this lesson, students will use their newly-acquired knowledge of aggregate supply and aggregate demand to demonstrate the short-run fluctuations of GDP known as the business cycle. Four events will be analyzed: a decrease in aggregate demand, an increase in aggregate demand, a decrease in aggregate supply and an increase in aggregate supply. The goal of this lesson is primarily to increase students comfort with the aggregate demand and aggregate supply model. Lesson 70 Chapter Review: Aggregate Demand and Aggregate Supply Objective: In this lesson, students will review and synthesize material from the four previous lessons. Assessment of the learning from this chapter, in the form of several problems and questions, will also take place. Warnings about incorrect applications or inferences from the previous chapter are advanced. Students will be able to summarize the construction of the aggregate demand and two aggregate supply curves, as well as their use in describing macroeconomic phenomena like recessions. Lesson 71 Introduction to Fiscal Policy Objective: In this lesson, students will be introduced to fiscal policy, which is legislative policy related to spending and taxation. Students will learn the difference between discretionary, or active, and non-discretionary, or passive, fiscal policy. This lesson and the next focus on discretionary fiscal policy. In this lesson, students will learn and analyze the kind of fiscal policy used in response to a recession: expansionary fiscal policy. This kind of policy, students will learn, involves increases in government spending, decreases in taxes, or both.

15 HIGHER ALTITUDES IN ECONOMICS Lesson 72 Lesson 73 Lesson 74 Lesson 75 Lesson 76 Lesson 77 More About Fiscal Policy Objective: In this lesson, students will continue the discussion of discretionary fiscal policy by discussing and analyzing contractionary fiscal policy, characterized by increases in taxes, decreases in government spending. Students will also be introduced to some of the criticisms and differing opinions about fiscal policy. Automatic Stabilizers Objective: In this lesson, students will learn about non-discretionary fiscal policy, which involves automatic changes to taxation and spending that are tied to GDP. These automatic stabilizers have the same effect as discretionary fiscal policies, but do not require action by Congress or the President to set them in motion. The National Debt Objective: In this lesson, students will learn about the relationship between government spending, taxation, and the national debt. Students will learn that in years where government runs a budget deficit, the debt of the government increases. In years when the government runs a budget surplus, the debt of the government decreases. Students will also learn some facts about the national debt, including its size, and to whom it is owed. Finally, students will get an introduction to the debate regarding whether the national debt is actually as big a deal as some make it out to be. Fiscal Policy & Public Debt Objective: In this lesson, students will review and synthesize material from the four previous lessons. Assessment of the learning from this chapter, in the form of several problems and questions, will also take place. Warnings about incorrect applications or inferences from the previous chapter are advanced. Students will be able to summarize the difference between discretionary and non-discretionary fiscal policy, the difference between expansionary and contractionary fiscal policy, and some facts about the public debt. The Federal Reserve Objective: In this lesson, students will learn about the structure of the Federal Reserve System. This lesson is highly informational. Students will learn about the 12 Federal Reserve banks, the Federal Reserve Board of Governors, and the Federal Open Market Committee. Students will also learn about the history and goals of the Federal Reserve System. Students will be introduced learn to think of the Federal Reserve as a bank for banks. How the Fed Creates and Destroys Money Objective: In this lesson, students will be introduced to the main tools of monetary policy: the reserve ratio, open market operations and the discount rate. The impact of each of these monetary policy tools on the money supply will be discussed as well as the relative importance of each of these in actual Federal Reserve policy.

16 HIGHER ALTITUDES IN ECONOMICS Lesson 78 Lesson 79 Lesson 80 Lesson 81 Lesson 82 Lesson 83 Contractionary Monetary Policymakers Objective: In this lesson, students will relate the use of monetary policy back to the aggregate demand and aggregate supply model by investigating the short-run effects of altering the money supply. Specifically, students will focus on fighting inflation using contractionary policy policy designed to shift the aggregate demand curve to the left and decrease equilibrium GDP. Expansionary Monetary Policy Objective: In this lesson, students will focus on the use of monetary policy to fight recessions. This type of monetary policy which is designed to shift the aggregate demand curve to the right to increase GDP and restore full employment is known as expansionary monetary policy. Students will also learn about the cyclical asymmetry of monetary policy. Chapter Review: Monetary Policy Objective: In this lesson, students will review and synthesize material from the four previous lessons. Assessment of the learning from this chapter, in the form of several problems and questions, will also take place. Warnings about incorrect applications or inferences from the previous chapter are advanced. Students will be able to summarize the functions and organization of the Federal Reserve System, the process of money creation and the difference between expansionary and contractionary monetary policy. Comparing Economic Systems Objective: In this lesson, students will learn about the intellectual foundations of market versus command economic systems. Students will also learn about the strengths and weaknesses of these systems, and they will be able to compare and contrast mixed systems that contain elements of both. Facts about the World Economy Objective: In this lesson, students will learn about the history, purpose and effects of major international organizations like the World Trade Organization, the World Bank and the International Monetary Fund. Students will look at current and historical data on real GDP and real GDP per capita for several countries and relate these measures to standard of living. International Trade Objective: In this lesson, students will learn about the logic of international trade by recalling and using the concepts of absolute and comparative advantage. Students will also use demand-and-supply diagrams to illustrate international trade. Students will discuss the ways in which trade affects the interaction of buyers and sellers in markets, as well as the domestic effects of international trade for both importing countries and exporting countries.

17 HIGHER ALTITUDES IN ECONOMICS Lesson 84 Lesson 85 Lesson 86 Lesson 87 Lesson 88 Lesson 89 Trade Policies Objective: In this lesson, students will learn about policies aimed at restricting trade and their impacts on the economies involved. We will discuss common arguments in favor of limiting international trade as well as the most important criticisms of these arguments. Students will learn about exchange rates and their impact on trade. Finally, students will learn about the relationship between monetary policy and exchange rates. Chapter Review: Economics in the Rest of the World Lesson Eighty Five Chapter Review: Economics in the Rest of the World Objective: In this lesson, students will review and synthesize material from the four previous lessons. Assessment of the learning from this chapter, in the form of several problems and questions, will also take place. Warnings about incorrect applications or inferences from the previous chapter are advanced. Students will be able to summarize the differences between market and command economies, general facts about specific national economics, the logic of international trade, and the impacts of certain policies on trade. Household Decision Making Objective: In this lesson, students will recall the use of marginal benefit and marginal cost analysis in decision making. They will begin to see the application of this type of analysis, along with the concepts of scarcity and opportunity cost, to the types of decisions that households face, particularly with respect to finances. Personal Finance Strategy Objective: In this lesson, students will develop a personal finance strategy for earning, spending, saving and investing. Students will learn about compounding interest and the importance of time in building assets and savings. Students will also be introduced to many key concepts relating to personal or household finances, including credit, creditworthiness, mortgages, retirement, financial instruments like 401(k)s and IRAs, insurance, etc. Students will discuss ideal strategies and discuss why these ideals are often not realized. Personal Decision Objective: In this lesson, students will be introduced to a decision-making model that involves the following steps: stating a problem, listing alternatives, establishing criteria, weighing options, making the decision, and evaluating the result. This decision-making model will be used to evaluate different potential decisions like careers, saving tools, and investment tools. Risk Management Objective: In this lesson, students will be introduced to the concept of risk management, as well as the related topics of avoidance, reduction, retention, and transfer. Students will learn about insurance as a theoretical concept and the practical role of insurance in helping households avoid the pitfalls of uncertainty.

18 HIGHER ALTITUDES IN ECONOMICS Lesson 90 Chapter Review: Economics in the Home Objective: In this lesson, students will review and synthesize material from the four previous lessons. Assessment of the learning from this chapter, in the form of several problems and questions, will also take place. Warnings about incorrect applications or inferences from the previous chapter are advanced. Students will be able to summarize how the concept of marginal analysis applies to household decisions, the tools of personal finance, a strategy for personal decision making and the ways in which households deal with risk.

19 STUDENT MANUAL ECONOMICS LESSON 88 Lesson 88 Personal Decision Personal Decisions In this course, you ve learned a lot about how economists discuss the decisions of households, firms, and the whole economy. And even though cost-benefit analysis is a good guideline for describing why a person makes a decision ( the benefits must have outweighed the costs ), it is not particularly helpful in describing the actual process by which people make decisions. There are many different processes that people use to help them make decisions, and some of them are more helpful than others. Some people use past experiences; some people use rules of thumb; some people follow their gut feelings; some people follow the advice of friends; some people do what is easiest; some people always do what is hardest. Any simplification of a decision like this, however, is unlikely to be successful 100% of the time. However, in some situations, the difference between making the best decision and making a second-best decision is so negligible that it makes sense not to take the decision too seriously. For example, when you re deciding which soup to buy at the grocery store, what do you really stand to gain or lose from going through a long, complicated, formal decision making process? Not much. Since making informed or well-thought-out decisions can be costly (it takes time and effort), in many cases the cost is not justified.

20 STUDENT MANUAL ECONOMICS LESSON 88 However, if you re deciding what line of work to go into, what to study in college, how to save for retirement, whether or not to get married, etc., the payoffs from making the right decision (as well as the losses from making the wrong decision) are amplified, so a more serious decision making process might be called for. However, some people get so used to using simple rules of thumb or stereotypes or past experiences and so on to make decisions that they actually never learn how to take decision-making seriously. In these situations, the cost of a well-thought-out decision is so high, that they never make a wellthought-out decision! The good news is, by learning different decision making techniques and practicing making well-informed and thought-out decisions, you can reduce the cost to you of this process, making it something that you will do more and more often. In this lesson, we are going to discuss one possible way of organizing the decision-making process to reduce the cost to you of making good decisions. There are many different ways to make decisions, and this is just one of them. The goal of this lesson is not to teach you the way that will always be the best way for you to make decisions, but rather to introduce you to the idea that practicing making good decisions can make them easier to make in the future. One Method of Making Decisions In this lesson, we are going to discuss one method for making decisions. As we go through this lesson, you should think about a decision that you might have to make in the near future. Perhaps you are deciding which college to go to, or what to major in when you go to college. Or maybe your college plans are set but you re starting to think about whether to go to law school, medical school, business school or grad school. Or, perhaps you re not certain you even want to go to college. Whatever the case, you re entering a period in your life where your decisions are going to start becoming more and more important, and the potential benefit from making good decisions is getting larger and larger.

21 STUDENT MANUAL ECONOMICS LESSON 88 Here is the basic decision-making process that we will use in this chapter: 1. State the problem. 2. List alternative solutions. 3. Establish criteria that will guide your choice. 4. Weigh your different options against those criteria. 5. Choose one option. 6. Evaluate the results. As we discuss the basics of each of these steps below, try to relate this decision-making process to a decision that you have to make. State the problem. This may seem simple, but many people never take the time to fully grasp the problem or decision that they face. Often, they allow several different choices to get mixed together, making it impossible to make decisions carefully. For example, rather than saying I have to make decisions about college be specific: I have to decide whether or not to go to college. If you decide to go to college then you face another decision: I have to decide what my major will be in college. That is a separate decision, and lumping both decisions together into one problem will make it a harder problem to solve with any kind of accuracy. List alternative solutions. How many different realistic options are there? Some problems only have two solutions ( go to college or don t go to college ), but many problems have more than two ( I could major in Economics, Mathematics, Physics or History ). Be careful that you consider even options that may not appear obvious at first. For example, attending community college for two years to take general education requirements may be a third option in your decision about college. When deciding on a major, you could also choose to enter college undeclared and take a variety of courses until you discover what field you most want to go into.

22 STUDENT MANUAL ECONOMICS LESSON 88 Establish the criteria that will guide your choice. This is probably the step that most people skip when making decisions. If you don t know what the best decision looks like, how will you know it when you see it? You have to establish criteria for evaluating your options. For example, your decisions about college may have to meet the following criteria: your chosen solution must be affordable, it must allow you to have a good career in the future, it must satisfy your parents requirements, etc. The more specific you are about the criteria that your solution must meet, the easier it will be for you to eliminate options that are not satisfactory, and the sooner you will narrow it down to the one best option. Weigh your different options against those criteria. Now that you have your criteria, go back to your different alternatives and weigh them all against your criteria. How many of your criteria does each option meet? Do any of your options meet all of the criteria? If so, do some of your options exceed the criteria? If none of your options meet all of your criteria, were your criteria too strict? Did you leave out another alternative solution that does meet all of your criteria? Choose one option. By weighting your different options against your criteria, you will hopefully be able to narrow it down to one option that either meets the most of your criteria or meets all of them the best. If you have several options that are tied according to your existing criteria, you may need to establish additional criteria in order to evaluate them. Be careful not to simply compare your tied-for-first options to one another. You must establish criteria for comparing them to one another before you make the comparison. Again, if you don t know what the best option will look like, how can you tell which of your tied-for-first options is best. Once you have it narrowed down to just one option, this is your choice. Implement it as the situation calls for. If you have decided to go to college, you need to make sure you take college entrance exams and begin applying to colleges, etc. If you decide on a major, you need to make sure you have done all the relevant course work in high school to prepare you for this major.

23 STUDENT MANUAL ECONOMICS LESSON 88 Evaluate the results. This is a very important and often-overlooked part of this process. After you have made a decision and implemented it, you must look back on your decision and evaluate its success. Doing so will help you to discover whether there were criteria that you neglected to consider the first time. For example, if you chose to major in History in college but then, after four years of it, you find yourself incredibly bored, you might look back and realize that you forgot to include will it be enjoyable or fun? as one of your criteria. By assessing this decision and recognizing where you made your mistake, you will learn that, in the future, when you make decisions, you need to include it must be enjoyable as one of your criteria. Evaluating the results that you get from the decision you ve made will help you to learn more about how best to make personal decisions, and the more you do it, the more you ll find yourself making successful decisions. Take some time today to either write down how you can apply these six steps to an important decision you face. Or, if you d rather, talk to your parent or guardian about a decision and how best to apply these six steps to making that decision. (People with experience making both good and bad decisions will be particularly helpful in establishing criteria. Don t resist their advice; they ve probably been through this process themselves, and perhaps they wish they d used different criteria.) You ll probably be surprised how much easier it is to see the best decision when you organize your thoughts and your decision-making process.

24 STUDENT MANUAL ECONOMICS LESSON 88 Notes and Student Response Name:

25 STUDENT MANUAL ECONOMICS LESSON 88 Use your digital tools to create graphs, charts. Etc.

26 STUDENT MANUAL ECONOMICS LESSON 89 Lesson 89 Risk Management Risk Management We ve been speaking about uncertainty as it relates to household decisions in the last couple of lessons. Businesses also face risks. Because the uncertainty related to business can be very costly, within the business field there has developed quite an interest in studying different ways of responding to risk, leading to the creation of a field called risk management, which encompasses all activities related to assessing and responding to risks. In this lesson, we are going to talk about some of the basic tenets of risk management, but rather than addressing them to business, we ll be talking about them in the context of household decisions.

27 STUDENT MANUAL ECONOMICS LESSON 89 Avoidance One possible response to risk is risk avoidance, which involves eliminating risk by not undertaking activities that are risky. Obviously, not all risks can be avoided; in fact, most of the uncertainty that households face comes from risks that are unavoidable. For example, all people run the risk of suffering an injury or developing some different illnesses. One could avoid the risk of declining home values by never buying a home; one could avoid the risk of getting into a car accident by never driving or riding in a car. Can you think of any risks that households or individuals can avoid altogether? Reduction As far as households are concerned, risk reduction is much easier to accomplish than is risk avoidance. Risk reduction means finding ways to reduce the magnitude of a potential loss. In other words, rather than trying to avoid a risk, risk reduction means that you accept that the risk is there but you take steps to protect yourself in the event of a loss. The most common way that households reduce risk is through insurance. Generally speaking, insurance is a product that you purchase that pays a monetary benefit in the case that you suffer a loss. Households typically by insurance related to the following things: automobiles, homes and health. The basic structure of any kind of insurance is as follows: the insured pays a premium the price of the insurance contract to the insurer. If no loss is ever experienced, the insurer keeps the premium money collected as profit. If the insured experiences a loss, however, the insurer is required by the contract to pay the insured. The funds given to the insured in the case of a loss are referred to as benefits. Different kinds of insurance cover different kinds of losses, and different contracts have different specific conditions. The most common kinds of insurance are discussed below. Auto insurance. Auto insurance is required for all drivers. Among other things, auto insurance protects drivers from having to face to full cost of potential liabilities in the case of an accident. Suppose you accidentally damage property or seriously injure someone in your car. You could be responsible for paying back hundreds of thousands of dollars in damages. Do you have that money? Probably not. In fact, almost no one does. But you needn t worry; if you are an insured driver, your insurance company will cover those

28 STUDENT MANUAL ECONOMICS LESSON 89 potential losses for you if they occur. Hopefully they do not, but an insured driver does not have to worry about coming up with hundreds of thousands of dollars in cash. Auto insurance also helps pay for repairs to your car if it is damaged. Typically, there is a deductible involved. A deductible is an amount that an insured person must pay out of pocket before insurance benefits will be granted. We will talk about the reason for deductibles in a little bit. Homeowners (or renters) insurance. Homeowners insurance and renters insurance have some similarities. In both cases, this kind of insurance will pay to replace possessions lost to theft or fire. Specific contracts differ with respect to what items are replaceable and maximum benefits. Homeowners insurance also includes provisions for benefits in case of damage to the house, similar to auto insurance. Renters are not required to hold renters insurance, but homeowners are usually required to hold insurance, particularly in case someone is injured on the property of the home (which would make the homeowner responsible similar to if you injure someone with your car). Health insurance. Health insurance pays benefits when the insured requires medical care. Most people think of health insurance as a product that provides the insured with access to care, but that is not exactly right. When someone is sick, he goes to see his doctor. This is a kind of loss that is covered by most health insurance contracts, so the health insurance provider pays the medical bill for the insured. Many health insurance contracts also have deductibles, like auto insurance, as well as copayments. Copayments are partial payments that insured persons make. For example, many health insurance contracts require that insured individuals pay $10 or $20 of the price of an office visit, and the insurance company covers the rest. Copayments and deductibles exist to solve one essential problem with insurance: moral hazard. Moral hazard refers to the incentive that insured individuals have to behave in an irresponsible way. For example, if you knew that your possessions would all be replaced in the case that you got robbed, do you think you would be more likely to forget to lock your door? Of course. A person who knows that she will have to replace all of her belongings herself will definitely remember to lock the door! The fact that an insured person behaves in a way that makes him or her more likely to suffer a loss is a problem with all insurance. By requiring that insured individuals also suffer some (small) loss, copayments and deductibles attempt to reduce the problem of moral hazard.

29 STUDENT MANUAL ECONOMICS LESSON 89 Transfer Transferring risk simply means strategizing to cause the risk to fall on someone else. Insurance contracts are sometimes described as a transfer of risk, but in reality, they are just a transfer of losses. For example, if you have auto insurance you still face the risk of an accident, not the insurance company. The fact that you have insurance means that if there are damages as the result of an accident, the insurance company will suffer the losses, not you. There are not a lot of examples of households being able to transfer risk, but oftentimes individuals come together in order to share risk, which is similar. Fraternal organizations, like the Knights of Columbus, provide examples of this. Families of members of the KofC get paid benefits upon the death of the member, in order to cover funeral expenses, etc. The members of this group, rather than bearing the risk of unexpected funeral expenses themselves, all come together to share one another s risk. So part of one member s risk is borne by other members, and that member also bears a little bit of everyone else s risk. Risk Retention Any risks that are not transferred or avoided are technically retained. Risk retention happens in the case of some risks where the potential loss is too big or too small or where the probability of a loss is too big or too high. In these cases, it can sometimes be unprofitable for insurance companies to provide insurance or dumb for households to seek insurance. For example, do you think you can by hiccup insurance that pays a benefit if you ever get the hiccups? No first of all, the probability of you getting hiccups sometime in your life is nearly 100%, so the insurance company would almost certainly have to pay benefits; secondly, the cost to you of getting hiccups is so low that it doesn t make sense for you to want to collect an insurance benefit. Risks that cannot be avoided or insured against need to just be dealt with as well as you can think to deal with them. Usually, this involves budgeting for the potential loss. Depending on your personal attitude towards risk, you may wish to budget for the full amount of the loss or a partial amount. Many financial advisors recommend that households have money saved that equals about 6 to 8 months worth of bills. Because you cannot insure against every possible thing that could happen in life, keeping this money on hand is a way of budgeting for potential losses that are uninsurable.

30 STUDENT MANUAL ECONOMICS LESSON 89 As was stated at the beginning of this lesson, most of the work done in the field of risk management involves business decisions. But as you ve seen in this lesson, the proper management of risk can help households and individuals as well.

31 STUDENT MANUAL ECONOMICS LESSON 89 Notes and Student Response Name:

32 STUDENT MANUAL ECONOMICS LESSON 89 Use your digital tools to create graphs, charts. Etc.

33 STUDENT MANUAL ECONOMICS LESSON 90 Lesson 90 Chapter Review: Economics in the Home What This Chapter Said We started this chapter by exploring some of the things that make household decision making difficult, specifically uncertainty and time preferences. It is very easy to compare costs and benefits when they are known with certainty and when they occur immediately. But it is a lot more difficult to compare costs and benefits when they are not known with certainty or when they occur in the future. For the most part, people value the present more than the future, so current benefits mean more than future benefits and current costs mean more than future costs. In the next lesson, we talked about how economists view the changing decisions over a lifetime. In young age, people tend to consume more than they earn. Also, in old age people do the same thing. It is only during the middle years of life that people tend to earn more than they consume, which helps them pay back debts accrued in young age and helps them save in anticipation of consumption in old age.