What skills are needed for success in an undergraduate program?
The undergraduate major in economics develops three skills: logical thought used in solving problems, observation and inference from data, and presenting ideas in compelling writing and speech.
Logical analysis underlies an economist’s ability to understand economic phenomena. A sample question about the Federal Reserve illustrates the style of analysis.
Many programs use algebra and some use calculus as tools for understanding economic events. Some courses in economics ask students to complete a series of problem sets that consist of elaborate algebra word problems. Developing skill in translating between mathematical models and observed economic phenomena is usually essential. Sample numeric problems below illustrate how students in economics use algebra.
Logical analysis and use of mathematics often involves radical simplification to allow focus on a logical cause-and-effect relationship, much as physics often imagines a world without friction to describe basic relationships. The mathematics then provides models that reveal significant connections while ignoring other features of the phenomenon. The models are often applied in many settings rather than having to be reinvented for each new situation.
The ability to create and interpret a chart is a skill developed in an economics program. A sample chart below depicts how the Federal deficit has performed over the last 35 years.
It is essential for students majoring in economics to be able to write clearly. Being able to write thoughtfully and clearly is the best way to show an understanding of economic theory and concepts. The ability to build an argument in the form of an essay is a valuable skill developed in many economics programs. Oral presentations also play a role in some programs. Allyn & Bacon publishers offer a website on public speaking.
Dr. Carolyn Hopper, Professor of English and author of Practicing College Learning Strategies,4th ed., Houghton Mifflin, 2007 offers a website that describes general study skills. Equmath.net provides study materials for mathematics from algebra and calculus to linear algebra and differential equations.
The Open Market Committee of the Federal Reserve looks at evidence about the rate of inflation, that is, the rate of increase in the general price level, and the expected rate of inflation, and decides to act to reduce inflation. Will it buy bonds from investors in the open market, using money from its accounts, or will it sell bonds from its reserves in exchange for investors’ money?
A bond is a contract. The seller of the bond receives the face amount of the bond at the time of the sale and agrees to pay the holder of the bond a certain amount each quarter until the bond matures (expires) at which time the bondholder receives the return of the face amount of the bond. Once a bond is issued, its current price varies in the marketplace for bonds as investors’ respond to changing interest rates. When interest rates on similar assets rise, the holders of a given bond will want their bond to pay the same interest rate as other similar assets. A fall in the current price of the bond means that the fixed bond payment provides a higher rate of interest relative to the current price. The bond’s interest payment is fixed; the bond’s market price varies as market interest rates vary.
Here is the analysis. When the Federal Reserve sells bonds, the market price of bonds will go down and thereby increase the current rate of interest of the bonds. (The fixed interest payment relative the lower market price of the bond means the current rate of interest earned by the bond is higher.) With higher interest rates, investors will economize on the use of funds, businesses will begin fewer capital projects, the pace of economy activity will slacken, and inflation will, in time, come down.
Three Numeric Problems
Steve Lobsey offers videos of economic diagrams that he uses in his economics courses in Australia.
Acme Weavers operates a plant that weaves thread into cloth. It can produce 500 yards of cotton cloth per hour or 350 yards of linen per hour. Describe the different combinations of cotton and linen the Acme plant can produce in 40 hours of production per week. Summarize the combinations in a diagram. How many yards of linen can the plant produce if it produces 10,000 yards of cotton cloth?
*Solution is at the bottom of the page.
The Flour Mill
A farmer can grind grain into flour for use on the farmstead at a cost equivalent to half of the flour in terms of the farmer’s time and equipment. Alternatively, the farmer can take the grain to a miller. The miller will keep one-tenth of the grain in payment for the milling and return 90 percent to the farmer. To use the miller, the farmer must transport the grain to the miller and the flour back again at a cost of two percent of the weight of the grain per mile one-way. What is the maximum distance a farmer would transport grain to the miller rather than grind the grain at home?
*Solution is at the bottom of the page.
The Price of Concrete
Because of the weight of concrete, ready-mix is not shipped very far. As a result, each local area is a different market. In Madison County, Reddi-Max and Castanet are the only two firms. Each is keenly aware of the price per cubic yard of delivered concrete (for a standard recipe as a benchmark) offered by the other. Either might set a low price or a high price.
The table shows the profit of each, given its price and the price of its rival. Reddi-Max’s profit ($millions) is in the lower left and Castanet’s profit is to the upper right of each cell in the table. If they both charge a low price, Castanet earns $7 million and Reddi-Max $5 million in profit. If both charge a high price, Castanet will earn $10 million and Reddi-Max will earn $8 million. If Castanet charges a high price while Reddi-Max charges a low price, Castanet loses $3 million and Reddi-Max earns $14 million. If Castanet offers a low price and Reddi-Max offers a high price, Castanet earns $15 million and Reddi-Max loses $2 million. To summarize, they earn their highest profits if they charge high prices but with high prices, either can earn much more by offering a low price when its rival sticks with a high price. The management at Castanet asks your advice about price. Do you recommend a high price or a low price?
Castanet Profit to the right, Reddi-Max Profit to the left in $millions.
Low Price by Castanet
High Price by Castanet
Low Price by Reddi-Max
Castanet will earn $7m
Reddi will earn $5m
Castanet will earn(lose) -$3m
Reddi will earn $14m
High Price by Reddi-Max
Castanet will earn $15m
Reddi will earn(lose) -$2m
Castanet will earn $10m
Reddi will earn $8m
* Solution is at the bottom of the page
The chart shows the size of the surplus (and deficit) of the US Federal Government using annual data from the Bureau of Economic Analysis. The values are computed from data available at the Federal Reserve Economic Data source at the St. Louis Federal Reserve Bank. The surplus is revenues minus expenses and is called Net Federal Government Savings. When the Federal budget is in surplus, the government is adding to national savings. When the budget is in deficit, the government is drawing from private savings to pay for the budget by selling bonds. The chart shows the surplus as a ratio to Gross Domestic Product (GDP is the sum of the value of all good and services produced in the economy). Reporting the surplus as a ratio to GDP shows it relative to the size of the economy. This is an Excel chart.
Look at the chart and comment on the Federal budget under each of the last seven presidents. When did surpluses occur? When were deficits largest relative to GDP? Compare the changes under the different presidents and contrast the budgets under Republican presidents to those under Democratic presidents.
On Writing in Economics
This Guide (PDF) addresses issues in writing from choosing a topic, searching the literature, and finding data to writing the essay and documenting sources. Here is its note on choosing a topic:
Selecting a topic is the first and perhaps most important step in writing a research paper. One of the better ways to choose a topic is to review material you have already studied to discover what unanswered questions you are interested in pursuing. Your professor can help you develop sound topics, ones that are sufficiently narrow so they can be tackled and sufficiently broad so that they are interesting. A list of past economics theses is available from your advisor. You may get ideas of what constitutes a successful thesis by looking at some of them. They can be borrowed by asking your advisor.
Along with useful counsel in preparing an original essay, Colby puts use of the Internet in perspective.
The Internet can be a useful place to do economic research. However, its usefulness should not be overestimated by students, nor should it be incorrectly used. The Internet is not a replacement for books. If you want to find out about the role of trade unions during the Truman administration, you should search for "Truman" and "trade unions" in the Colby catalog, not Yahoo! Additionally, because the Internet is unregulated, information received there should be regarded with a great deal of skepticism if the source is unknown. When used properly, as a fast and easy way of accessing credible publications, and as a supplement to library research, the Internet can be a valuable research source. However, when used improperly, or as the first and only site to research, it is woefully inadequate, and can be intellectually deceiving.
Pitzer describes the characteristics of the good economics essay. It emphasizes choosing a topic, exploring the existing literature, developing and using an outline, and drawing a well-founded conclusion. Here are its comments on plagiarism and citing references.
Plagiarism, the dishonest use of another's intellectual labor, is a serious offense and will be treated as such. While the Student Handbook fully describes the policies of the College in cases of plagiarism and cheating, an additional handout on how to avoid plagiarism by proper acknowledgment of sources is available from the Economics Department. If you are in doubt about what is plagiarism and what isn't, pick one up.
You are urged (but not required) to simplify your life and ours by using the author-date method of acknowledging sources. In this method, each written source is identified in the text (rather than in a footnote) by the author's last name and the year of publication. Footnotes are then needed only for material not considered important enough to be included in the text.
The rules given below for using this method are similar to those in A Manual of Style , 12th edition, published by the University of Chicago Press (1969, pp. 384-388).
- Both author and date of publication are typically enclosed in parentheses: My conclusions differ from those of an important earlier study (Friedman and Schwartz 1963).
- The citation should stand just before a punctuation mark. If this is impractical, it should be inserted at a logical break in the sentence: Since the Arab oil embargo at the end of 1973, numerous papers (Bergstein 1974; Krasner 1974; Varon and Takeuchi 1974) have assessed the probability of successful cartelization of other primary commodities.
- If the author's name has just been mentioned, it need not be repeated in the citation: According to Armington (1969), products distinguished by place of production are not perfect substitutes.
- Refer to a particular page, section, or equation as follows: (Keynes 1936, p. 156) (Tobin 1963, sec. 3) (Kemp 1969, eq. 6.12)
- For works with more than one author, use the full form of citation for two or three authors, but an abbreviated form of four or more. A work by three authors would be cited: (Little, Scitovsky, and Scott 1970)
- But instead of: (Sneezy, Dopey, Happy, Grumpy, Sleepy, Bashful, and Doc 1988) use: (Sneezy, et al. 1988)
- If you refer to two or more works by the same author published in the same year, distinguish the work as follows: (Armington 1969a) (Armington 1969b) etc. The Journal of Political Economy uses the author-date method. Check it for further examples.
Your bibliography should list all references cited in the text plus other sources you consulted but did not cite.
Books on Writing Economics
Diedre McCloskey, Economical Writing, Second Edition (Long Grove, IL: Waveland Press, 1999) ISBN 1577660633
The 98 pages in this paperback provide excellent advice about how to write well.
William Thomson, A Guide for the Young Economist, (Cambridge, MA: MIT Press, 2001) ISBN 9780262700795
This 144 page book counsels young economists on how to prepare essays for publication and how to make effect presentations.
Brian Gilbert, Writing Across the Curriculum, Northern Illinois University (1997) lists a number of sources that address the rhetoric of economics.
Famous Economists Discuss Their Writing
George Akerloff: "Writing the ‘The Market for "Lemons" ’: A Personal and Interpretive Essay" by George A. Akerlof --2001 Nobel Prize Winner in Economics
The original essay is "Market for ‘Lemons’: Quality Uncertainty and the Market Mechanism" Quarterly Journal of Economics, 84 #3, August 1970, pp. 488-500.
Akerloff discusses how, as a young economist, he came to write the 13-page essay that led to his Nobel Prize and the role the essay had in transforming economics.
Hal R. Varian: "What I’ve Learned about Writing Economics" University of California, Berkeley
Varian discusses how he approached writing his popular and influential textbooks, newspaper columns, and other works.
Students who pursue an undergraduate program in economics pursue a variety of careers. Some who enjoy economics and have good quantitative skills choose graduate study in economics. A number of organizations have opportunities for undergraduates.
*Solutions to the Sample Problems:
Acme Weavers: If Acme produces no cotton cloth, it can produce 14,000 yards of linen. If it devotes all its effort to cotton, it can produce 20,000 yards of cloth. These two points define the end points of a line that contains an infinite number of combinations of cotton and linen cloth that the plant might produce. One of the points is 10,000 yards of cotton and 7,000 yards of linen. This line is an example of a production possibility line. We need information about the prices of linen and cotton as well as the price of inputs to determine which of the possible combinations of outputs the firm will choose in order to maximize its profit.
Market Size: The farmer will face the same cost of grinding at home or using the mill when the cost of milling at home, 0.5 per pound, is equal to the cost of grinding at the mill, 0.1 + 0.02 *2 M where M is the miles to the mill. Solving gives M = 10 miles. Farmers within ten miles of the mill will have lower costs by using the mill. Farmers beyond ten miles from the mill will have lower cost by milling at home.
The Price of Concrete: If Castanet and Reddi-Max know each other and see that they are both in the market for the long-haul, Castanet will recognize that if it undercuts Reddi-Max's high price with a low price, Reddi-Max will respond with its own low price in the next period. They will then be locked into low prices with low profits. Therefore, Castanet is likely to stick with a high price as long as it expects Reddi-Max to do the same. If either cheats with a low price, the rival will respond with a low price as well. If they do not trust each other, they will each choose low prices to protect themselves from the losses that would come if one is high and the other is low. This is an example of the prisoner’s dilemma, an example from game theory.