SOLUTION MANUAL FOR FUNDAMENTALS OF ECONOMICS 5TH

EDITION BY BOYES
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CHAPTER 1
Economics and the World Around You

FUNDAMENTAL QUESTIONS
1. Why are some countries rich while others are dirt poor?
2. What are private property rights?
3. What is economic freedom?
4. What are opportunity costs?
5. What are the gains from trade?

TEACHING OBJECTIVES
The primary purpose of this chapter is to define and explain the scope of economics and the
methodology economists’ use in solving problems. The chapter uses global variations in wealth as the
take-off point for the examination of concepts like scarcity, property rights and opportunity cost.
A unique feature of this chapter is the economic way of thinking showing students how to apply the
tools of economic thinking to everyday decisions. The chapter also focuses on the scientific method as
economists apply it.
The appendix requires special attention. Graphs are used throughout the course, so the student will need
a good knowledge of how a graph is constructed and how to interpret its lines. It would be best to
follow the examples in the appendix so that the student has both the text and class notes to review.
Stress that the concept of scarcity is a key element in all economic analysis and a link to the rest of the
course.

KEY TERMS
scarcity
opportunity costs
tradeoffs
resources

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land
labor
capital
financial capital
comparative advantage
gains from trade
private property rights
specialization
economic freedom

LECTURE OUTLINE AND TEACHING STRATEGIES

1. Why Are Some Countries Rich While Others Are Dirt Poor?
One of the first questions ever considered in the study of economies was why the wealth of nations
varies so much. Adam Smith, a Scottish moral philosopher, attempted to describe in his 1776 book The
Wealth of Nations the conditions that enable a country to become wealthy. .

Teaching Strategy: Start by using a map that illustrates the global distribution of income. Ask students
to speculate on how they would live if they earned only $1 per day as many people around the world
do.

2. What Are Private Property Rights?

Property rights confer ownership or the right to do anything you want with what you own as long as it
does not harm the property of others. Private property rights provide the owner of property with the
incentive to put that property to its best use and provides the owner with the right to receive the benefit
of that use.
Teaching Strategy: Ask your students to explain why homeowners behave differently from renters.
•In command economies, like China, Cuba and North Korea, private property rights are extremely
limited.
Teaching Strategy: Show students a picture of the Korean peninsula at night from space
(KoreaNS.jpg). Why is North Korea dark and South Korea so bright?

3. What Is Economic Freedom?

Economic freedom is the ability to engage in voluntary trade without interference or restrictions by
government or outside parties.
Teaching Strategy: In 2010 the United States ranked 8th on the Heritage Foundation/Wall Street
Journal Index of Economic Freedom. Ask students to brainstorm on some ways in which their

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publicly accessible website, in whole or in part.
 Full file at https://testbanku.eu/ Chapter
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economic freedom is limited.•In general, the higher the level of economic freedom in a country, the
higher that country’s standard of living is.
Teaching Strategy: Ask students if to think about whether China is an exception to this rule.

4. What Are Opportunity Costs?

Opportunity costs are the highest-valued alternative that must be forgone when a choice is made.
Teaching Strategy: Ask your students what they would be doing if they were not attending class today.
Answers will usually be sleeping or working!
 The major opportunity cost of going to school is the income forgone during four years of study.
Teaching Strategy: Start your lecture by asking the students to list all their costs of going to
college on a sheet of paper. Then, ask if anyone included the cost of not working for four years.
 Resources are classified into three general categories: land, labor, and capital. (Some economists
distinguish entrepreneurship as distinct from labor.) People sell their resources in order to obtain
income.
Teaching Strategy: Use local examples of capital and natural resources. Ask students if they
know who owns those resources.

5. What Are the Gains from Trade?

Trade is mutually beneficial for individuals, families, towns, and countries. Gains from trade are
possible because the people become better off with trade than they would be if they could consume only
those goods they could produce on their own.
Teaching Strategy: Create a scenario where the students in your class are stranded in the nearest
upscale resort. They are the only people there, and have free access to everything, including the
restaurants, mansions, food and beverage stores, etc. They can have everything at the resort but can
only trade amongst themselves. Would they be better off than they are now?

OPPORTUNITIES FOR DISCUSSION

1. How is it possible for people to live earning only $1 per day?
2. Why are well-defined property rights and the existence of economic freedom essential for the
attainment of a high standard of living?
3. What alternatives did you have to attending school?
4. Are admissions to Ivy League schools scarce? How do we know?
5. How does the scarcity of a resource such as oil affect your daily life?
6. Discuss the opportunity costs of Roger Federer, Lorena Ochoa, Jeff Gordon, or another major
sports or entertainment figure.
7. Describe the opportunity costs of individuals who specialize in surgery, auto repair, plumbing, or
college teaching.
8. List the major goods your state produces. Does your state have a comparative advantage in these
goods? Can you describe the reasons for this comparative advantage?

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ANSWERS TO EXERCISES
1. Diamonds are scarcer than water.
2. People leave tips at a restaurant they visit often in order to ensure high-quality future service.
People leave tips at a restaurant they go to only once for several reasons: to lessen their guilt, to
ensure that their companions think they are generous, and to contribute to higher-quality service
throughout the entire restaurant industry with the idea that they will get better service in the future
if everyone acts as they act.
3. People find contributing to charities gives them a good feeling. People might also find that they
feel less bad when they see a homeless person Steaks, houses, cars, and T-shirts are scarce goods
since people are willing to pay for these goods. Garbage is not a scarce good since people do not
desire garbage even when they do not have to pay for it. In fact, people pay to have garbage
removed.
4. The concept ignored is opportunity costs. It is impossible to have more and better health,
education, infrastructure, and other things without giving up something else.
5. . There is an opportunity cost to everything. The time spent at lunch has a cost; you could be
doing something else. .

INTERNET EXERCISES AND SOLUTIONS

1. International Trade
This chapter introduces the benefits of trade. Use the Internet to examine U.S. international trade.
Examine the current U.S. Census Bureau trade statistics at http://www.census.gov/foreign-
trade/statistics/highlights/top/index.html.
Below are the year-to-date trade statistics for May 2007. Find the most current report and fill in the
table below. Note any changes.
Total Trade (Goods) Year-to-Date May 2007

      Current   

Rank Country Percentage of Total Trade      Percentage

1 Canada 18.5% _____
2 China 11.8% _____
3 Mexico 11.2% _____
4 Japan 7.0% _____

Exports (Goods) Year-to-Date May 2004

Current 

Rank Country Percentage of Total Trade Percentage

1 Canada 21.7% _____
2 Mexico 12.0% _____
3 Japan 5.6% _____
4 China 5.3% _____

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Imports (Goods) Year-to-Date May 2004

Current 

Rank Country Percentage of Total Trade Percentage

1 Canada 16.6% _____
2 China 15.7% _____
3 Mexico 10.8% _____
4 Japan 7.8% _____

Are there any new countries among the top four trading countries with the United States?

Answers
Answers will change over time. Look to see if China’s ranking has changed.

2. College Attendance
The Preview discusses the choice between going to college or not. Use the Internet to examine the
number of people who choose to attend college. Go to the table of contents and data found in the
Statistical Abstract of the United States at http://www.census.gov/acsd/www/sub_e.htm Click on the
table for “Education Attainment.” Use the data in Table 1a, percentages.
Plot the percentage of males that had a bachelor’s degree or more on the vertical axis and age group on
the horizontal axis. Using the same graph, next plot the percentage of females by age group.
1. Describe the trend.
2. What could explain the difference between males and females?

Answers
1. Males and females have similar overall percentages with a bachelor’s degree, but younger females
are more likely to have a BA or above and older males are more likely to have a BA or above.
2. Young males may decide to work or join the military before college. Females may now be
encouraged to go to college. Males may decide later that they need or want a degree. Another
possibility is 30–40 years ago women were not encouraged to pursue higher education.

ACTIVE LEARNING EXERCISE

Divide students into pairs. Have each student make a list of the tasks they like to do and the ones they
do not like to do. Then suggest that students barter with each other based on their preferences.

© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a
publicly accessible website, in whole or in part.