How to "think", when solving problems for your economics class - FreeEconHelp.com, Learning Economics... Solved!

5/29/11

How to "think", when solving problems for your economics class

When most students take their first economics class, one of two things usually happen.  Either the class makes sense with almost no effort, or it is like the class is being taught in a foreign language which you cannot speak.  I think that this mostly has to do with the way someone perceives the world, and if you tend to analyze decisions thinking about costs and benefits, or take a logical/mathematical approach, then economics is going to come very easy to you.  However, since you are at this site, this is probably not the case.  The rest of this post is going to state an effective way to think about economics problems, so that if it doesn't come naturally to you, you can use this approach to make the best out of the situation.

Solving problems in economics is a lot like writing a mathematical proof or logic statement.  You begin with a situation, which is represented in circle A.  You then have some event occur, which is represented by the arrow B.  Depending on what B was, you will end up in other situation, represented by the circle C.

This example may seem very simplistic, but
essentially that is because economics is very simple.  Economics makes all kinds of simplifying assumptions and then only changes one thing to discover the effect of that change.  The trick is understanding the definitions and rules that dictate how our B arrow, changes our A situation.

Here are a few examples:  The market for coffee is in equilibrium (A).  The government raises minimum wage so that income goes up (B).  This results in a shift in demand (B), and a new equilibrium with higher prices and quantity demanded (C).  See?  Easy.

Another example:  Two countries each produce two products (A).  They decide to specialize in their comparative advantage and trade (B).  How much do they each produce and consume now (C)?

This is simplifying what may seem to be a difficult problem but I generally observe that the students who do not do well in economics are over thinking the problems.  If you really do simply it to this 3 part system, you will not over think the problem, and will hopefully get more of the questions correct on your next homework and exam.


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