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20 CHAPTER 1 ANALYZING ECONOMIC PROBLEMS

By contrast, the minimum wage places the en- come to low-wage workers? Note that Landsburg’s
tire burden on one small group: the employers of piece involves two important value judgments: First,
low-wage workers and, to some extent, their cus- it is generally better for the burden of income redis-
tomers. Suppose you’re a small entrepreneur with, tribution to be borne by a larger group of the citi-
say, 10 full-time minimum-wage workers. Then a 50 zenry than by a smaller group. Second, more trans-
cent increase in the minimum wage is going to cost
you about $10,000 a year. That’s no different from a parent policies for redistributing income (like the
$10,000 tax increase. But the politicians who im- Earned Income Tax Credit) are better than policies
posed the burden get to claim they never raised any- that are less transparent (like the minimum wage)
body’s taxes. because it is easier to hold politicians accountable for
If you want to transfer income to the working more transparent policies.
poor, there are fairer and more honest ways to do it. Examples of both positive analyses and norma-
The Earned Income Tax Credit, for example, accom- tive analyses of economic issues abound, though one
plishes pretty much the same goals as the minimum generally finds them in different places. Positive
wage but without concentrating the burden on a tiny analyses tend to be found in professional academic
minority. For that matter, the EITC also does a better journals such as the American Economic Review
job of helping the people you’d really want to help, as (where the Card and Krueger study was published),
opposed to, say, middle-class teenagers working sum-
mer jobs. It’s pretty hard to argue that a minimum- Journal of Political Economy, or Econometrica.
wage increase beats an EITC increase by any criterion. Normative analyses are often presented in op-ed
pieces or columns (Landsburg’s article appeared in
the “Everyday Economics” column in Slate), policy-
Landsburg’s article is an example of a normative oriented outlets, such as the Economists’ Voice, or (in-
analysis. It addresses a prescriptive question: Should creasingly these days) blogs, such as the ones written
the minimum wage be replaced by other policies by economists Paul Krugman, Greg Mankiw, Brad
(such as the earned income tax credit) that transfer in- DeLong, or Gary Becker and Richard Posner.

CHAPTER SUMMAR Y

• Economics is the study of the allocation of limited subject to a constraint (LBD Exercises 1.1 and 1.2);
resources to satisfy unlimited human wants. It is often (2) equilibrium analysis, used to describe a condition or
described as the science of constrained choice. state that could continue indefinitely in a system, or at
least until there is a change in some exogenous variable;
• Microeconomics examines the economic behavior of and (3) comparative statics, used to examine how a change
individual economic decision units, such as a consumer in some exogenous variable will affect the level of some
or a firm, as well as groups of economic agents, such as endogenous variable in an economic model, including
households or industries.
equilibrium (LBD Exercise 1.3) and constrained opti-
• Economic studies are often conducted by construct- mization. (LBD Exercise 1.4)
ing and analyzing models of a particular problem. • The term marginal in microeconomics measures the
Because the real world is complex, an economic model amount by which a dependent variable changes as the re-
represents an abstraction from reality.
sult of adding one more unit of an independent variable.
• In analyzing any model, one needs to understand • Microeconomics provides tools we can use to examine
what variables will be taken as given (exogenous vari- positive and normative issues. Positive analysis attempts to
ables), as well as what variables will be determined explain how an economic system works and to predict how
within the model (endogenous variables).
the endogenous variables will change as exogenous vari-
• Three essential tools of microeconomic analysis are ables change. Normative analysis considers prescriptive
(1) constrained optimization, a tool that decision makers questions such as “What should be done?” Normative
use to maximize or minimize some objective function studies introduce value judgments into the analysis.