problem solving economics

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• Prof. Jonathan Gruber

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• Microeconomics

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Principles of microeconomics, problem set 1.

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Preparation

The problem set is comprised of challenging questions that test your understanding of the material covered in the course. Make sure you have mastered the concepts and problem solving techniques from the following sessions before attempting the problem set:

• Introduction to Microeconomics
• Applying Supply and Demand

Problem Set and Solutions

• Problem Set Questions (PDF)
• Problem Set Solutions (PDF)

Problem Solving Video

In the video below, a teaching assistant demonstrates his approach to the solution for problems 1 and 4 from the problem set. The teaching assistant notes common mistakes made by students and provides problem solving techniques for approaching similar questions on the problem set and exams.

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• Download transcript

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Examples of economic problems

The fundamental economic problem is the issue of scarcity but unlimited wants. Scarcity implies there is only a limited quantity of resources, e.g. finite fossil fuels. Because of scarcity, there is a constant opportunity cost – if you use resources to consume one good, you cannot consume another. Therefore, an underlying feature of economics is concerned with dealing how to allocate resources in society to make the most efficient and fair use of resources. The main issues are:

• What to produce?
• How to produce?
• For whom to produce?

Examples of economic problems include

• How to deal with external costs/pollution , e.g. pollution from production.
• How to redistribute income to reduce poverty , without causing loss of economic incentives.
• How to provide public goods (e.g. street-lighting) which are usually not provided in a free market.
• How should we measure economic welfare? Is it wrong to focus on ouptut and income? (as economics has in the past) – New measures of economic welfare try to include broader range of factors, such as environment, education, health care.

Video summary

Micro economic problems

1. The problem of externalities

The economic problem of pollution

One of the most frequent problems is that economic decisions can have external effects on other people not involved in the transaction. For example, if you produce power from coal, the pollution affects people all over the world (acid rain, global warming). This is a particular problem because we cannot rely on the free market to provide the most efficient outcome. If we create negative externalities , we don’t take them into account when deciding how much to consume. This is why we can get overconsumption of driving a car into a city centre at peak hour. If everyone maximises their utility, it doesn’t lead to the most efficient outcome – but gridlock and wasted resources.

Externalities, usually need some kind of government intervention. For example, taxes on negative externalities (e.g. sugar tax) or subsidies on positive externalities (e.g. free public education) even banning cars in city centres.

But, even the solution to market failure (e.g. taxes), creates its own potential problems, such as how much to tax? will there be tax evasion? The administration costs of collecting tax.

Environmental issues

Economics is traditionally concerned with utility maximisation – allowing individuals to aim at increasing their economic welfare. However, this can ignore long-term considerations of environmental sustainability. If we have over-consumption in this century, it could cause serious problems for future generations – e.g. global warming, loss of non-renewable resources. The difficulty is that the price mechanism doesn’t take into account these future costs, and policies to reduce consumption may prove politically unpopular.

– How to deal with potential future environmental costs?

Monopoly was an economic problem that Adam Smith was concerned about in his influential book of economics “A Wealth of Nations.” For various reasons firms can gain monopoly power – and therefore the ability to set high prices to consumers. Given a lack of alternatives, monopolies can make high profits at the expense of consumers, causing inequality within society. Monopoly power can also be seen through monopsony employers who pay lower wages to their workers.

How to deal with the problem of monopoly? – A government may seek to encourage competition, e.g. rail franchising, or price regulation to prevent excessive prices.

Inequality/poverty

This shows that 10% of the world population still live on below $1.90 a day – though the figure has reduced in past three decades.

Inequality is considered a problem because of normative opinions such as – it is an unfair distribution of resources. Also, you could argue there is a diminishing marginal utility of wealth . If all wealth is owned by a small percentage of the population, this reduces net welfare. Redistributing the money to the very poor would enable a greater net utility to society.

Five of the world’s largest companies  Apple, Microsoft, Alphabet, Cisco and Oracle, have a total of $504bn cash savings (2015) This is money unused, whilst people around the world have insufficient food.

Inequality is a problem. However, it is also a problem to know how much we should seek to reduce poverty. Many will agree on the necessity of reducing absolute poverty – but how far should we take it? Should we aim for perfect equality (Communism) or should we aim for equality of opportunity?

Another issue with reducing poverty is that measures to reduce poverty may cause unintended consequences – e.g. higher income tax on high earners may create disincentives to work. Giving benefits to the low paid may reduce incentives to work.

Volatile prices

Some agricultural markets can have volatile prices. A glut in supply can be bad news because the fall in price can lead to lower revenue for farmers. It could even cause some to go out of business because of a bad year. These volatile markets can cause swings in economic fortunes.

Irrational behaviour

In some asset markets, we have seen volatile prices exacerbated by irrational exuberance . Consumers have often been caught up in a market frenzy – hoping that rising prices will make them richer – and expecting prices to keep rising. We can see this in issues such as tulip mania , the South Sea Bubble, railway mania, and the recent property bubbles.

Macroeconomic problems

Mass unemployment 1933

Unemployment has been a major economic problem in advanced economies. One of the principal causes of unemployment is swings in the business cycle. A fall in demand for goods during a recession, causes people to be laid off. Because of the depressed state of the economy, there is an imbalance between demand and supply of workers.

Unemployment can also be caused by rapid changes in labour markets, for examples, unskilled workers unable to gain employment in a high tech economy. Unemployment is a problem because it is a waste of resources, but more importantly, it leads to very high personal costs, such as stress, alienation, low income and feelings of failure.

A recession is a period of negative economic growth – a decline in the size of the economy. It exacerbates problems of inequality and unemployment. A problem of recession is that it can create a negative spiral. When demand falls, firms lay off workers. The unemployed have less money to spend causing further falls in demand.

In the great depression, unemployment rose to over 20% – the unemployed also had little support and relied on soup kitchens.

High inflation can be a serious problem if prices rise faster than wages and nominal interest rates. In periods of rapidly rising prices, people with savings will see a decline in their real wealth. If prices rise faster than wages, then people’s spending power will decline. Also, rapidly rising prices creates confusion and uncertainty and can cause firms to cut back on investment and spending.

Countries which have experienced hyperinflation , have seen it as a very traumatic period because all the economic certainty is washed away, leaving people without any certainty. Hyper inflation can cause not just economic turmoil but political turmoil as people lose confidence in the economic situation of the economy.

Balance of payments/current account deficit

A current account deficit on the balance of payments means an economy is importing more goods and services than it is exporting. To finance this current account deficit, they need a surplus on the financial/capital account. For many modern economies, a small current account deficit is not a problem. However, some developing economies have experienced a balance of payments crisis – where the large deficit has to be financed by borrowing, and this situation usually leads to a rapid devaluation of the currency. But, this devaluation increases the price of imports, reduces living standards and causes inflation.

Exchange rate volatility

In some cases, the exchange rate can cause economic problems. For example, countries in the Euro were not able to change the value of their currency against other Eurozone members. Because countries like Greece and Portugal had higher inflation rates, they became uncompetitive. Exports fell, and they developed a large current account deficit. The overvalued exchange rate caused a fall in economic growth.

On the other hand, a rapid devaluation can cause different problems. For example, when the price of oil fell, oil exporting countries saw a decline in export revenues, leading to a fall in the value of the currency. A rapid devaluation causes the price of imports to rise and causes both higher inflation and lower growth. A difficult problem for policymakers to deal with.

Development economics

Developing economies face similar economic problems, but any issue is magnified by low GDP and high levels of poverty. For example, unemployment in a developing economy is more serious because there is unlikely to be any government insurance to give a minimum standard of living.

Poverty cycle . Some developing economies may be stuck in a poverty trap. Low growth and low saving ratios lead to low levels of investment and therefore low economic growth. This low growth and poverty cause the low savings and investment to be continued.

More examples

• Problems facing UK economy in 2015
• Economic problems of EU

Last updated: 17th November 2019, Tejvan Pettinger , www.economicshelp.org, Oxford, UK

28 thoughts on “Examples of economic problems”

Scarcity in resource is all over. It could be jobs, skills, capital, land, medicines, equipment, hospitals, universities, schools, houses, food, water etc

Sorry…it is not yet….

Enjoyed the lesson

what does economic mean

That is economic factors are addressed

Can I buy printed materials of this article Economic problems

Hi, Pettinger!

Really nice article, thank you. However, I am not sure I’ve got something you stated: isn’t inequality a macroeconomics issue? Because, you see, the scope of microeconomics is restricted to the individual actions of the economic agents (i.e., the “invisible hand science”) and inequality can only be properly handled by a macroeconomics perspective – or, at least, that’s the way I see it. Can you clarify that, please?

P.S.: if you are interested, I’ve answered this same question at stackexchange ( https://economics.stackexchange.com/questions/41448/is-inequality-a-micro-or-macro-economics-issue )

Govt.is also responsible for inequality , unemployment and low GDP growth by not taking efficient decisions in order to boost the economy.

Comments are closed.

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1.1 What Is Economics, and Why Is It Important?

Learning objectives.

By the end of this section, you will be able to:

• Discuss the importance of studying economics
• Explain the relationship between production and division of labor
• Evaluate the significance of scarcity

Economics is the study of how humans make decisions in the face of scarcity. These can be individual decisions, family decisions, business decisions or societal decisions. If you look around carefully, you will see that scarcity is a fact of life. Scarcity means that human wants for goods, services and resources exceed what is available. Resources, such as labor, tools, land, and raw materials are necessary to produce the goods and services we want but they exist in limited supply. Of course, the ultimate scarce resource is time- everyone, rich or poor, has just 24 hours in the day to try to acquire the goods they want. At any point in time, there is only a finite amount of resources available.

Think about it this way: the total land area of the main Hawaiian islands is only 10,931 square miles. Because land and other natural resources are limited, so are the numbers of goods and services we can produce with them. Combine this with the fact that human wants seem to be virtually infinite, and you can see why scarcity is a problem.

If you still do not believe that scarcity is a problem, consider the following: Does everyone need food to eat? Does everyone need a decent place to live? Does everyone have access to healthcare? In Hawaiʻi there are people who are hungry, homeless, and in need of healthcare, just to focus on a few critical goods and services. Why is this the case? It is because of scarcity. Let’s delve into the concept of scarcity a little deeper, because it is crucial to understanding economics.

What is a good and what is a service?

Goods have a physical tangible presence, for example, a pizza or a scissors. Services have no physical tangible presence but have economic value (people are willing to pay to get this service). Examples of services include the delivery of a pizza or getting your hair cut.

Only around 20% of workers in the US work at jobs where they produce goods. The percentage is even smaller in Hawaiʻi: only 4% of workers in Hawaiʻi produce goods! What are the main services produced in Hawaiʻi and what are the main goods?

The Problem of Scarcity

Think about all the things you consume: food, shelter, clothing, transportation, healthcare, and entertainment. How do you acquire those items? You do not produce them yourself. You buy them. How do you afford the things you buy? You work for pay. Or if you do not, someone else does on your behalf. Yet most of us never have enough to buy all the things we want. This is because of scarcity. So how do we solve it?

Visit this website to read about how the United States is dealing with scarcity in resources.

Every society, at every level, must make choices about how to use its resources. Families must decide whether to spend their money on a new car or a fancy vacation. Towns must choose whether to put more of the budget into police and fire protection or into the school system. Nations must decide whether to devote more funds to national defense or to protecting the environment. In most cases, there just isn’t enough money in the budget to do everything. So why do we not each just produce all of the things we consume? The simple answer is most of us do not know how, but that is not the main reason. (When you study economics, you will discover that the obvious choice is not always the right answer—or at least the complete answer. Studying economics teaches you to think in a different of way.) Think back to pioneer days, when individuals knew how to do so much more than we do today, from building their homes, to growing their crops, to hunting for food, to repairing their equipment. Most of us do not know how to do all—or any—of those things. It is not because we could not learn. Rather, we do not have to. The reason why is something called the division and specialization of labor , a production innovation first put forth by Adam Smith in his book, The Wealth of Nations .

The Division of and Specialization of Labor

The formal study of economics began when Adam Smith (1723–1790) published his famous book The Wealth of Nations in 1776. Many authors had written on economics in the centuries before Smith, but he was the first to address the subject in a comprehensive way. In the first chapter, Smith introduces the division of labor , which means that the way a good or service is produced is divided into a number of tasks that are performed by different workers, instead of all the tasks being done by the same person.

To illustrate the division of labor, Smith counted how many tasks went into making a pin: drawing out a piece of wire, cutting it to the right length, straightening it, putting a head on one end and a point on the other, and packaging pins for sale, to name just a few. Smith counted 18 distinct tasks that were often done by different people—all for a pin, believe it or not!

Modern businesses divide tasks as well. Even a relatively simple business like a restaurant divides up the task of serving meals into a range of jobs like top chef, sous chefs, less-skilled kitchen help, servers to wait on the tables, a greeter at the door, janitors to clean up, and a business manager to handle paychecks and bills—not to mention the economic connections a restaurant has with suppliers of food, furniture, kitchen equipment, and the building where it is located (check out the video below). A complex business like a large manufacturing factory or a hospital can have hundreds of job classifications.

The Division of Labor at work at Marukame Udon in Waikiki:

Why the Division of Labor Increases Production

When the tasks involved with producing a good or service are divided and subdivided, workers and businesses can produce a greater quantity of output. In his observations of pin factories, Smith observed that one worker alone might make 20 pins in a day, but that a small business of 10 workers (some of whom would need to do two or three of the 18 tasks involved with pin-making), could make 48,000 pins in a day. How can a group of workers, each specializing in certain tasks, produce so much more than the same number of workers who try to produce the entire good or service by themselves? Smith offered three reasons.

First, specialization in a particular small job allows workers to focus on the parts of the production process where they have an advantage. (In later chapters, we will develop this idea by discussing comparative advantage .) People have different skills, talents, and interests, so they will be better at some jobs than at others. The particular advantages may be based on educational choices, which are in turn shaped by interests and talents. Only those with medical degrees qualify to become doctors, for instance. For some goods, specialization will be affected by geography—it is easier to be a wheat farmer in North Dakota than in Florida, but easier to run a tourist hotel in Florida than in North Dakota. If you live in or near a big city, it is easier to attract enough customers to operate a successful dry cleaning business or movie theater than if you live in a sparsely populated rural area. Whatever the reason, if people specialize in the production of what they do best, they will be more productive than if they produce a combination of things, some of which they are good at and some of which they are not.

Second, workers who specialize in certain tasks often learn to produce more quickly and with higher quality. This pattern holds true for many workers, including assembly line laborers who build cars, stylists who cut hair, and doctors who perform heart surgery. In fact, specialized workers often know their jobs well enough to suggest innovative ways to do their work faster and better.

A similar pattern often operates within businesses. In many cases, a business that focuses on one or a few products (sometimes called its “ core competency ”) is more successful than firms that try to make a wide range of products.

Third, specialization allows businesses to take advantage of economies of scale , which means that for many goods, as the level of production increases, the average cost of producing each individual unit declines. For example, if a factory produces only 100 cars per year, each car will be quite expensive to make on average. However, if a factory produces 50,000 cars each year, then it can set up an assembly line with huge machines and workers performing specialized tasks, and the average cost of production per car will be lower. The ultimate result of workers who can focus on their preferences and talents, learn to do their specialized jobs better, and work in larger organizations is that society as a whole can produce and consume far more than if each person tried to produce all of their own goods and services. The division and specialization of labor has been a force against the problem of scarcity.

Trade and Markets

Specialization only makes sense, though, if workers can use the pay they receive for doing their jobs to purchase the other goods and services that they need. In short, specialization requires trade.

You do not have to know anything about electronics or sound systems to play music—you just buy an iPod or MP3 player, download the music and listen. You do not have to know anything about artificial fibers or the construction of sewing machines if you need a jacket—you just buy the jacket and wear it. You do not need to know anything about internal combustion engines to operate a car—you just get in and drive. Instead of trying to acquire all the knowledge and skills involved in producing all of the goods and services that you wish to consume, the market allows you to learn a specialized set of skills and then use the pay you receive to buy the goods and services you need or want. This is how our modern society has evolved into a strong economy.

Why Study Economics?

Now that we have gotten an overview on what economics studies, let’s quickly discuss why you are right to study it. Economics is not primarily a collection of facts to be memorized, though there are plenty of important concepts to be learned. Instead, economics is better thought of as a collection of questions to be answered or puzzles to be worked out. Most important, economics provides the tools to work out those puzzles. If you have yet to be been bitten by the economics “bug,” there are other reasons why you should study economics.

• Virtually every major problem facing the world today, from global warming, to world poverty, to the conflicts in Syria, Afghanistan, and Somalia, has an economic dimension. If you are going to be part of solving those problems, you need to be able to understand them. Economics is crucial.
• It is hard to overstate the importance of economics to good citizenship. You need to be able to vote intelligently on budgets, regulations, and laws in general. When the U.S. government came close to a standstill at the end of 2012 due to the “fiscal cliff,” what were the issues involved? Did you know?
• A basic understanding of economics makes you a well-rounded thinker. When you read articles about economic issues, you will understand and be able to evaluate the writer’s argument. When you hear classmates, co-workers, or political candidates talking about economics, you will be able to distinguish between common sense and nonsense. You will find new ways of thinking about current events and about personal and business decisions, as well as current events and politics.

The study of economics does not dictate the answers, but it can illuminate the different choices.

Key Concepts and Summary

Economics seeks to solve the problem of scarcity, which is when human wants for goods and services exceed the available supply. A modern economy displays a division of labor, in which people earn income by specializing in what they produce and then use that income to purchase the products they need or want. The division of labor allows individuals and firms to specialize and to produce more for several reasons: a) It allows the agents to focus on areas of advantage due to natural factors and skill levels; b) It encourages the agents to learn and invent; c) It allows agents to take advantage of economies of scale. Division and specialization of labor only work when individuals can purchase what they do not produce in markets. Learning about economics helps you understand the major problems facing the world today, prepares you to be a good citizen, and helps you become a well-rounded thinker.

Self-Check Questions

• What is scarcity? Can you think of two causes of scarcity?
• Residents of the town of Smithfield like to consume hams, but each ham requires 10 people to produce it and takes a month. If the town has a total of 100 people, what is the maximum amount of ham the residents can consume in a month?
• A consultant works for $200 per hour. She likes to eat vegetables, but is not very good at growing them. Why does it make more economic sense for her to spend her time at the consulting job and shop for her vegetables?
• A computer systems engineer could paint his house, but it makes more sense for him to hire a painter to do it. Explain why.

Review Questions

• Give the three reasons that explain why the division of labor increases an economy’s level of production.
• What are three reasons to study economics?

Critical Thinking Questions

• Suppose you have a team of two workers: one is a baker and one is a chef. Explain why the kitchen can produce more meals in a given period of time if each worker specializes in what they do best than if each worker tries to do everything from appetizer to dessert.
• Why would division of labor without trade not work?
• Can you think of any examples of free goods, that is, goods or services that are not scarce?

Bureau of Labor Statistics, U.S. Department of Labor. 2015. “The Employment Situation—February 2015.” Accessed March 27, 2015. http://www.bls.gov/news.release/pdf/empsit.pdf.

Williamson, Lisa. “US Labor Market in 2012.” Bureau of Labor Statistics . Accessed December 1, 2013. http://www.bls.gov/opub/mlr/2013/03/art1full.pdf.

Answers for Self-Check Questions

• Scarcity means human wants for goods and services exceed the available supply. Supply is limited because resources are limited. Demand, however, is virtually unlimited. Whatever the supply, it seems human nature to want more.
• 100 people / 10 people per ham = a maximum of 10 hams per month if all residents produce ham. Since consumption is limited by production, the maximum number of hams residents could consume per month is 10.
• She is very productive at her consulting job, but not very productive growing vegetables. Time spent consulting would produce far more income than it what she could save growing her vegetables using the same amount of time. So on purely economic grounds, it makes more sense for her to maximize her income by applying her labor to what she does best (i.e. specialization of labor).
• The engineer is better at computer science than at painting. Thus, his time is better spent working for pay at his job and paying a painter to paint his house. Of course, this assumes he does not paint his house for fun!

Principles of Microeconomics - Hawaii Edition Copyright © 2018 by John Lynham is licensed under a Creative Commons Attribution 4.0 International License , except where otherwise noted.

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Managerial Economics: A Problem Solving Approach 6th Edition

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• ISBN-10 0357748239
• ISBN-13 978-0357748237
• Edition 6th
• Publisher Cengage Learning
• Publication date January 18, 2023
• Language English
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• Print length 400 pages
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• Publisher ‏ : ‎ Cengage Learning; 6th edition (January 18, 2023)
• Language ‏ : ‎ English
• Hardcover ‏ : ‎ 400 pages
• ISBN-10 ‏ : ‎ 0357748239
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About the author

Michael r. ward.

Michael Ward is Professor of Economics at the University of Texas at Arlington and Research Associate at the Centre for European Economic Research (ZEW) in Mannheim, Germany.

Michael Ward studied mathematics and economics at the University of California, Los Angeles (UCLA) and earned his doctorate in economics from the University of Chicago. Previous positions include Staff Economist at the US Federal Trade Commission (FTC) and Assistant and Associate Professorships at the University of Illinois, Urbana Champaign. He has had past affiliate research positions with Instituto de Pesquisa Econômica Aplicada (IPEA) in Brazil, with the Institute for Government and Public Affairs (IGPA) at the University of Illinois, with the Consortium for Research on Telecommunications Policy (CRTP), and with ZEW. He is a coeditor of Contemporary Economic Policy and has been a guest editor of Information Economics and Policy.

Michael Ward has worked as a professional economist in government, academia, and the private sector. His research interests include competition and innovation policy in high technology industries, especially information and communication technologies (ICTs) and pharmaceuticals. His research has appeared in the Review of Economics and Statistics, Journal of Law and Economics, Research Policy, and Journal of Industrial Economics. He is a coauthor of the textbook Managerial Economics: A Problem Solving Approach.

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American Journal of Economics

p-ISSN: 2166-4951    e-ISSN: 2166-496X

2019;  9(2): 79-85

doi:10.5923/j.economics.20190902.06

Understanding the Economics of Problem-Solving. A Longitudinal Review of the Economic Influence of Inspiration Labs- Three Years Journey on Socio-Economic Solutions

Mohamed Buheji

International Inspiration Economy Project, Bahrain

Copyright © 2019 The Author(s). Published by Scientific & Academic Publishing.

We are living in a crowded creative world where problem-solving is not a commodity or a unique skill for leaders, but it is somewhat becoming a must for survival, for future foresight and competitive economic differentiation. Literature has a significant gap in the area of the economics of problem-solving, despite the recent rise of the term ‘solution economy’. In this paper, we shall explore the different types of socio-economic problems confronted in the three years’ journey of Inspiration Labs carried out the Inspiration Economy Project and in different countries. The discussion of each of the economic vectors for each problem is followed by a proposed framework on the ‘economic solutions vectors’ shows how to tackle any socio-economic problem-solving and lead to the economic development that supports the flourishment of the targeted communities.

Keywords: Solution Economy, Economics of Problem-Solving, Inspiration Labs, Inspiration Economy

Cite this paper: Mohamed Buheji, Understanding the Economics of Problem-Solving. A Longitudinal Review of the Economic Influence of Inspiration Labs- Three Years Journey on Socio-Economic Solutions, American Journal of Economics , Vol. 9 No. 2, 2019, pp. 79-85. doi: 10.5923/j.economics.20190902.06.

Article Outline

1. introduction, 2. literature review, 2.1. the solution economy, 2.2. solving socio-economic problems through inspiration labs, 2.3. acceleration of solution economy, 2.4. visualising the economics of problem-solving and solution economy, 2.5. issues of problem-solving solutions economy, 2.6. how solution economy can solve bigger economic problems, 2.7. solution economy vs economics of problem solution, 2.8. cycle of economy thinking and problem-solving, 3. methodology, 4. case study, 4.1. role of problem-solving case studies in the economy, 4.2. case studies that reflect the economic influence of problem-solving, 5. discussion, 5.1. the economic constructs of socio-economic problems, 5.2. diagnosis of economic problem-solving outcomes, 5.3. economic outcome differentiation through empathetic story scenario, 6. conclusions.

Using Documented Problem Solving in Economics

Documented problem solving has been used effectively in Principles of Economics courses at a large, public, research institution over the last few years. It's been used with the topics of production possibilities, supply and demand, price elasticity and consumer demand, market structures, the labor market, unemployment, fiscal and monetary policy, GDP per capita and economic growth, effective tax rates, international trade plus many more. Clearly, it can be applied to virtually any economics course. Students find the process challenging at first, but because the process itself is not graded, they soon relax and enjoy it as a tool that serves to enhance their learning process.

Documented Problem Solving Fosters Development of Critical Thinking and Problem-Solving Skills

Angelo & Cross (1993, p. 222) write "To become truly proficient problem solvers, students need to learn to do more than just get correct answers to textbook problems. At some point, they need to become aware of how they solved those problems and how they can adapt their problem-solving routines to deal with messy, real-world problems. . . Understanding and using effective problem-solving procedures is, after all, a critical component of mastery in most disciplines." Documented problem solving requires students to reflect on how they solve a problem and then write down the steps they use.

As students describe how they break an economic problem down into small, basic steps, they frequently write:

• First, I reviewed the definition of...
• I opened my notes to the section on...
• The first thing my group thought about was...
• I remembered the graph you drew and...
• The directions say to find where the...
• According to the equation...
• I read the question and then I read it again...

Thus, documented problem solving provides a window through which the instructor can see students' thinking processes. It is rewarding for instructors to see students become more purposeful and deliberate in their approach to solving problems and to even develop problem-solving patterns that can be transferred to other areas in economics and other fields of study. Through the use of documented problem solving, students become more efficient learners; more expert-like in their thinking process.

Documented Problem Solving - Question Types

Documented problem solving works well with multiple choice, true/false and short answer questions. Questions from test banks will typically work and are readily available. Alternatively, faculty may choose to write their own questions. Questions do not need to be overly challenging in order to be suitable for documented problem solving, but they must require a multi-step thought process in order to arrive at the answer.

Economics questions that work well with this approach are those that:

• Require students to follow a predictable path to arrive at the correct answer.
• Involve calculations and require students to select the proper equation to use.
• Include data and require students to interpret it.
• Challenge students to think beyond what was delivered in the lecture or discussed in the text.
• Require students to combine several independent concepts or ideas to achieve the correct answer.
• Address topics that students typically struggle with.

A suitable economic question that students can write a documented problem solution for because it requires a multi-step process.

For product XYZ, the price elasticity of demand has an absolute value of 3. Ceteris paribus , this means that quantity demanded will increase by:

a) 1 percent for each 3 percent decrease in price. b) 1 unit for each $3 decrease in price.

c) 3 percent for each 1 percent decrease in price. d) 3 units for each $1 decrease in price.

Student's answer: First I opened my notes to read the definition for price elasticity of demand. Price elasticity measures the change in quantity demanded because of a change in price. The formula is (% change in quantity demanded) ÷ (% change in price). So for the answer to be 3, 3 goes on top (% change in quantity demanded) and 1 goes on bottom (% change in price). The real number is negative 3 because price and quantity demanded move in opposite directions. For this question, if price goes up by 1%, the quantity demanded goes down by 3%. Then I looked at the answer choices to see which one matched. If price goes down by 1%, then quantity demanded will go up by 3%, so c is the correct answer.

Economics questions that don't work well with this approach

Definition-type questions and questions that ask students to pick from a list are not good choices if they merely require students to recall memorized information. In such a case, there are no multiple steps for the student to describe. Remember, one of the primary reasons for using documented problem solving is to help students breakdown their solution process into individual steps which will ultimately assist them in developing analytical and critical thinking skills.

An unsuitable economic question that students cannot write a documented problem solution for because no problem-solving skills are required.

Which of the following countries produces the most output each year?

a) China b) United States c) Russia d) Mexico

Student's answer: The United States because that's what the table in the text says.

However, given that much of economics relies on analytical reasoning, it is easy to find plenty of questions that are appropriate.

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Computational Economics

Computational economics is a subfield of economics that uses computational methods to analyze economic problems. Computational economics includes the use of simulation and optimization models to study economic phenomena, design economic experiments, and evaluate economic policies.

Computational economics also takes advantage of newly available data sources, such as administrative data, to answer economic questions that were previously difficult or impossible to analyze. The goal of computational economics is to provide a set of tools that economists can use to answer economic questions.

One of the most important aspects of computational economics is the use of simulations to study economic problems. Simulations allow economists to study how different factors impact the economy without having to conduct real-world experiments. This makes it possible to study a much wider range of economic problems than would be possible with real-world experiments.

Simulations are also useful for studying problems that are too difficult or expensive to study in the real world. For example, economists may use simulations to study the impact of a natural disaster on the economy or the impact of a new economic policy .

Optimization models are another important tool used in computational economics. Optimization models are used to find the best way to allocate resources in order to achieve a specific goal. For example, an optimization model could be used to find the best way to allocate limited resources in order to maximize economic growth.

Computational economics is a relatively new field, and it is constantly evolving as new computational methods are developed and new data sources become available. Computational economics is an important tool for economists, and it is only going to become more important in the future.

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