I have recently read a textbook for Edexcel AS/A Level economics, the exam supposedly to be taken by UK students or other international students following UK syllabus. I wonder how it will explain the reason why demand curve is downward sloping. There is only one point offered: the law of diminishing marginal utility. I know DSE students, or most local high-school students, no longer need to learn anything about utility. I don't think it is a must to teach utility to high-school students. However, as mentioned in my earlier post, students should be told why demand curve is downward sloping. To me, using marginal utility is one way to explain the downward sloping pattern. But it has pros and cons for this method, as mentioned in another earlier post of mine. Let us see how the textbook uses marginal utility to explain the shape of the demand curve.
The book says: "The more buyers are offered, the less value they put on the last one bought. ...This illustrates the law of diminishing marginal utility. The value, or utility, attached to consuming the last product brought falls as more units are consumed over a given period of time. ...The law of diminishing marginal utility therefore explains why the demand curve is downward sloping. The higher the quantity bought, the lower the marginal utility (the utility from the last one) derived from consuming the product. So buyers will only pay low prices for relatively high amounts purchased..."
I appreciate the motivation that this book (or the entire AS/AL syllabus) tries to explain the law of demand to high school students. What is not ideal is that one should not confuse "value" with "utility". From the quote above, they are treated as if they are equal (see the sentence "The value, or utility"). As I mentioned in my earlier post, utility is not monetary value of a good while price is. They are of course closely related. But to close the gap between them, we need to convert "utility" into "value" by "marginal utility of money". A good generates utility. But buying one unit of this good, you need to sacrifice some money, which is the price of this good. How much you are willing to pay? Sacrificing some money, your utility is reduced because you can buy fewer other goods. Hence, if buying one extra unit of a good gives you 4 units of utility (your marginal utility of this good) but $1 gives you 2 units of utility (your marginal utility of money), then you are willing to pay $2 for one unit of this good.
In short, diminishing marginal utility cannot be straightforwardly translated into downward sloping demand curve. In fact, I find it not easy to explain the concept of marginal utility of money to high-school students (although I have tried it above). At high-school level, I prefer the explanation using substitution effect and income effect as suggested in my earlier post.
Wednesday, 22 September 2021
Monday, 20 September 2021
More on "aggregate demand curve, but why?"
In my last post, I mention the explanation for why individual demand curve is downward sloping in a Edexel AS/AL textbook. This book also explains why aggregate demand curve is downward sloping. Interestingly, its explanation is almost the same as the version that I have criticized in my past post.
"Demand curve is nearly always downward sloping. Why is the aggregate demand curve the same shape? One simple answer is to consider what happens to a household budget if prices rise. If a household is on a fixed income, then a rise in average prices will mean that they can buy fewer goods and services than before. The higher the price level in the economy, the less they can afford to buy. So it is with the national economy".
In my past post, I have explained: the fixed income assumption that is valid for any single individuals may not be valid for the whole economy. Put it simply, a higher price reduces the good buyers' purchasing power with a fixed income. But a higher price also increases the purchasing power of the good seller with more sale revenue obtained. Thus, the explanation based on fixed income is not valid.
Meanwhile, the book is not completely wrong as it immediately adds, after the above (invalid) explanation that there is a more sophisticated explanation (by assessing components of GDP: consumption, investment, government spending, and exports and imports). It turns out that these "more sophisticated" explanations do not rely on the "fixed income" assumption and are thus more likely valid. However, if the book can list out these explanations, why it chooses to mention the "fixed income" one, which is invalid?
For the "more sophisticated" explanations, the consumption and investment reasons rely on interest rates, and so is similar to the reason offered in my past post. The government spending is unaffected by price. The export-import reason is related to competitiveness of export goods relative to imported goods, and is intuitively understandable. When discussing why consumption will be depressed by prices, it also mentions wealth effect. I have remarked in my past post that wealth effect is not a straightforward issue. The explanation about wealth effect offered in this book cannot completely clear my doubt though it is not too bad. All in all, I think there is much scope for improvement in the explanation of aggregate demand.
"Demand curve is nearly always downward sloping. Why is the aggregate demand curve the same shape? One simple answer is to consider what happens to a household budget if prices rise. If a household is on a fixed income, then a rise in average prices will mean that they can buy fewer goods and services than before. The higher the price level in the economy, the less they can afford to buy. So it is with the national economy".
In my past post, I have explained: the fixed income assumption that is valid for any single individuals may not be valid for the whole economy. Put it simply, a higher price reduces the good buyers' purchasing power with a fixed income. But a higher price also increases the purchasing power of the good seller with more sale revenue obtained. Thus, the explanation based on fixed income is not valid.
Meanwhile, the book is not completely wrong as it immediately adds, after the above (invalid) explanation that there is a more sophisticated explanation (by assessing components of GDP: consumption, investment, government spending, and exports and imports). It turns out that these "more sophisticated" explanations do not rely on the "fixed income" assumption and are thus more likely valid. However, if the book can list out these explanations, why it chooses to mention the "fixed income" one, which is invalid?
For the "more sophisticated" explanations, the consumption and investment reasons rely on interest rates, and so is similar to the reason offered in my past post. The government spending is unaffected by price. The export-import reason is related to competitiveness of export goods relative to imported goods, and is intuitively understandable. When discussing why consumption will be depressed by prices, it also mentions wealth effect. I have remarked in my past post that wealth effect is not a straightforward issue. The explanation about wealth effect offered in this book cannot completely clear my doubt though it is not too bad. All in all, I think there is much scope for improvement in the explanation of aggregate demand.
Sunday, 19 September 2021
More on "The law of demand, but why?"
My earlier post "The law of demand, but why?" is one of my most widely read post in this blog. On one hand, this is perhaps due to its being related to high-school economics education, which can more easily arouse students' attention. On the other hand, this is perhaps due to its really touching on some important points.
Two (very smart) students asked me questions over the reason why demand curve is downward sloping upon reading my blog post. They raised some similar points. Let me share with you the question and my response here.
One student said that he has learned the concept of marginal benefit (of consuming a good) although he has not learned substitution effect and income effect as introduced in my post mentioned above. The marginal benefit (MB) is the additional benefit generated by consuming one more unit of a good. MB curve is downward sloping (when one consumes one more good, the extra benefit from this good is smaller). Hence, this is an explanation of why demand curve is downward sloping.
Is using MB curve sufficient for explaining demand curve? In my view, this is not sufficient. I do not know precisely what the student has learned about MB. Is MB the monetary value or monetary benefit that a consumer can derive from a unit of good? If so, then MB is the same, at least almost the same, as demand curve. Saying that MB is downward sloping is equivalent to say that demand curve is downward sloping. But this is not an explanation of why demand curve is downward sloping.
If MB is NOT the monetary benefit one can derive from a good but the satisfaction derived from a good, for example, the psychological or physical benefit, then MB is not equivalent to a demand curve. But a downward-sloping MB curve CANNOT be directly translated into a downward-sloping demand curve. The units for MB is satisfaction level; the unit for demand curve is money (price). To translate the MB schedule into a demand schedule, we need something in extra, such as the substitution effect and income effect.
The above is a relatively simple answer to the question. To answer further, it will involve economics beyond the level required by the readers of "hi, economics" (high school level). So, perhaps I am forced to stop here. Nonetheless, let me simply give you some hints for the thinking. What follows is not a rigorous analysis, which must be too technical for a blog. As I try to make a more intuitive explanation, I guess my explanation below might even be a little bit misleading when evaluated by rigorous logic. However, I hope it can serve to give you some hints.
Why MB in satisfaction term (or in utility term in economics) is not the same as demand in money term? To make things clearer, let me call MB in satisfaction terms marginal utility (MU). MU of x is not the same as demand curve. We need to divide MU of x by the MU of money (or income) to make things measured in money term (as required by the demand curve). What is MU of money? Well, it is about how many more units of satisfaction (or utility) that can be generated by having one extra unit of money.
To illustrate, consider a numerical example. Suppose that consuming one extra unit of x gives you 6 extra units of utility while an extra $1 gives you 2 extra units of utility. Then, you are willing to pay a price of (or sacrifice) $3 for getting this extra unit of x. By this logic, the demand curve should be MU of x divided by MU of money (6/2), not just MU of x (6).
Now, imagine one extra unit of x is consumed. The demand curve is, as said, about MU of x divided by MU of money. When x increases, MU of x should decline. This is the effect due to the so-called downward-sloping MB (or MU) curve. But things are not that simple. If x increases, one must reduce consumption of another good, say, good y, due to a fixed income. When y decreases, the MU of y will increase (if the MB or MU curve of y is also downward sloping). Furthermore, MU of money (income) should also change when there is a change in consumption portfolio as above. Thus, demand curve is not simply about MB or MU of a good but more factors. These factors include how far goods (x and y) can be substituted for one another (in generating utility) and the effect from income (in generating utility).
OK, perhaps you think the last three paragraphs are complicated and makes you confused. Well, as you can see in my post "The law of demand, but why?", it is not difficult to understand the reason why demand curve is downward sloping by substitution and income effect. The troubles come only if you try to relate substitution and income effect to MB curve. As MB curve is not as proper a way to explain demand curve, I would suggest that you directly think in terms of substitution and income effect as what my past post does.
Two (very smart) students asked me questions over the reason why demand curve is downward sloping upon reading my blog post. They raised some similar points. Let me share with you the question and my response here.
One student said that he has learned the concept of marginal benefit (of consuming a good) although he has not learned substitution effect and income effect as introduced in my post mentioned above. The marginal benefit (MB) is the additional benefit generated by consuming one more unit of a good. MB curve is downward sloping (when one consumes one more good, the extra benefit from this good is smaller). Hence, this is an explanation of why demand curve is downward sloping.
Is using MB curve sufficient for explaining demand curve? In my view, this is not sufficient. I do not know precisely what the student has learned about MB. Is MB the monetary value or monetary benefit that a consumer can derive from a unit of good? If so, then MB is the same, at least almost the same, as demand curve. Saying that MB is downward sloping is equivalent to say that demand curve is downward sloping. But this is not an explanation of why demand curve is downward sloping.
If MB is NOT the monetary benefit one can derive from a good but the satisfaction derived from a good, for example, the psychological or physical benefit, then MB is not equivalent to a demand curve. But a downward-sloping MB curve CANNOT be directly translated into a downward-sloping demand curve. The units for MB is satisfaction level; the unit for demand curve is money (price). To translate the MB schedule into a demand schedule, we need something in extra, such as the substitution effect and income effect.
The above is a relatively simple answer to the question. To answer further, it will involve economics beyond the level required by the readers of "hi, economics" (high school level). So, perhaps I am forced to stop here. Nonetheless, let me simply give you some hints for the thinking. What follows is not a rigorous analysis, which must be too technical for a blog. As I try to make a more intuitive explanation, I guess my explanation below might even be a little bit misleading when evaluated by rigorous logic. However, I hope it can serve to give you some hints.
Why MB in satisfaction term (or in utility term in economics) is not the same as demand in money term? To make things clearer, let me call MB in satisfaction terms marginal utility (MU). MU of x is not the same as demand curve. We need to divide MU of x by the MU of money (or income) to make things measured in money term (as required by the demand curve). What is MU of money? Well, it is about how many more units of satisfaction (or utility) that can be generated by having one extra unit of money.
To illustrate, consider a numerical example. Suppose that consuming one extra unit of x gives you 6 extra units of utility while an extra $1 gives you 2 extra units of utility. Then, you are willing to pay a price of (or sacrifice) $3 for getting this extra unit of x. By this logic, the demand curve should be MU of x divided by MU of money (6/2), not just MU of x (6).
Now, imagine one extra unit of x is consumed. The demand curve is, as said, about MU of x divided by MU of money. When x increases, MU of x should decline. This is the effect due to the so-called downward-sloping MB (or MU) curve. But things are not that simple. If x increases, one must reduce consumption of another good, say, good y, due to a fixed income. When y decreases, the MU of y will increase (if the MB or MU curve of y is also downward sloping). Furthermore, MU of money (income) should also change when there is a change in consumption portfolio as above. Thus, demand curve is not simply about MB or MU of a good but more factors. These factors include how far goods (x and y) can be substituted for one another (in generating utility) and the effect from income (in generating utility).
OK, perhaps you think the last three paragraphs are complicated and makes you confused. Well, as you can see in my post "The law of demand, but why?", it is not difficult to understand the reason why demand curve is downward sloping by substitution and income effect. The troubles come only if you try to relate substitution and income effect to MB curve. As MB curve is not as proper a way to explain demand curve, I would suggest that you directly think in terms of substitution and income effect as what my past post does.
Saturday, 18 September 2021
Mankiw and DSE syllabus
After writing the last two posts, I picked up a popular university textbook for first-year economics students, Gregory Mankiw's Principles of Economics, and had a look. I am not familiar with this book because I am not responsible for teaching principles of economics (the first economics course) in my university. I actually got the book from a former colleague. When he left, he gave me as a gift.
I surprisingly discovered that the treatments of demand curves in DSE economics syllabus can be exactly found in this (authoritative) textbook. First, it introduces the law of demand without explaining it. Second, it explains why aggregate demand (AD) curve is downward-sloping exactly by the three reasons required by the DSE syllabus: wealth effect, interest rate and export. I wonder, especially for AD, DSE simply follows this authoritative textbook's treatments. Thus, perhaps I shouldn't blame the DSE syllabus. It simply follows what the authority does.
Even so, I still think DSE should explain the reasons behind the law of demand in microeconomics. I will not be deterred by Mankiw's authority in economics teaching so as to change my view in this aspect. I still think the law of demand should be explained and there are ways to explain it in a non-technical manner. For example, written also for principles courses, Robert H. Frank and Ben S. Bernanke's Principles of Economics explains the law of demand in a very simple manner in its Chapter 3. Basically, it is still substitution effect and income effect:
"Thus, as pizza becomes more expensive, a consumer may switch to chicken sandwiches, hamburgers, or other foods that substitute for pizza. This is called the substitution effect of a price change. In addition, a price increase reduces the quantity demanded because it reduces purchasing power: A consumer simply can't afford to buy as many slices of pizza at higher prices as at lower prices. This is called the income effect of a price change." (p.61)
You can see: the reasons why demand curve is downward-sloping are as simple as such.
The Frank's and Bernanke's book actually has given the third reason, also very intuitive: everyone has a reservation price for the good a person may buy. If the actual price is higher than one's reservation price, one thinks it is not worthwhile for buying the good. When the price of a good rises, fewer people's reservation prices are higher than the actual price. So, fewer people will buy.
Yes, Frank's and Bernanke's book is slightly more advanced than Mankiw's. In Chapter 5 of the former book, it actually introduces a more detailed analysis of demand, using concepts of marginal utility. I think high schools need not go through the more advanced (or abstract) concepts like marginal utility. I think high schools need only to introduce something like Chapter 3 of the book, and it is sufficient to introduce only substitution and income effects as brief as above. The fact that Mankiw has not explained the law of demand so does not mean we don't need to. The fact that Frank and Bernanke is a slightly more advanced book does not mean that we should avoid following it in some selective aspects.
Of course, no any textbooks are perfect. I also will not rely on only one book for my comments. For example, Frank and Bernanke introduces a very peculiar AD curve, which plots inflation rate (not price level) against output. This is not the usual AD curve concept, which links price level with output. To me, which aspect should be taught should not be based purely on authority, but on some carefully thought reasons. I hope that when the DSE syllabus is under review one day, the law of demand is given some explanations.
I surprisingly discovered that the treatments of demand curves in DSE economics syllabus can be exactly found in this (authoritative) textbook. First, it introduces the law of demand without explaining it. Second, it explains why aggregate demand (AD) curve is downward-sloping exactly by the three reasons required by the DSE syllabus: wealth effect, interest rate and export. I wonder, especially for AD, DSE simply follows this authoritative textbook's treatments. Thus, perhaps I shouldn't blame the DSE syllabus. It simply follows what the authority does.
Even so, I still think DSE should explain the reasons behind the law of demand in microeconomics. I will not be deterred by Mankiw's authority in economics teaching so as to change my view in this aspect. I still think the law of demand should be explained and there are ways to explain it in a non-technical manner. For example, written also for principles courses, Robert H. Frank and Ben S. Bernanke's Principles of Economics explains the law of demand in a very simple manner in its Chapter 3. Basically, it is still substitution effect and income effect:
"Thus, as pizza becomes more expensive, a consumer may switch to chicken sandwiches, hamburgers, or other foods that substitute for pizza. This is called the substitution effect of a price change. In addition, a price increase reduces the quantity demanded because it reduces purchasing power: A consumer simply can't afford to buy as many slices of pizza at higher prices as at lower prices. This is called the income effect of a price change." (p.61)
You can see: the reasons why demand curve is downward-sloping are as simple as such.
The Frank's and Bernanke's book actually has given the third reason, also very intuitive: everyone has a reservation price for the good a person may buy. If the actual price is higher than one's reservation price, one thinks it is not worthwhile for buying the good. When the price of a good rises, fewer people's reservation prices are higher than the actual price. So, fewer people will buy.
Yes, Frank's and Bernanke's book is slightly more advanced than Mankiw's. In Chapter 5 of the former book, it actually introduces a more detailed analysis of demand, using concepts of marginal utility. I think high schools need not go through the more advanced (or abstract) concepts like marginal utility. I think high schools need only to introduce something like Chapter 3 of the book, and it is sufficient to introduce only substitution and income effects as brief as above. The fact that Mankiw has not explained the law of demand so does not mean we don't need to. The fact that Frank and Bernanke is a slightly more advanced book does not mean that we should avoid following it in some selective aspects.
Of course, no any textbooks are perfect. I also will not rely on only one book for my comments. For example, Frank and Bernanke introduces a very peculiar AD curve, which plots inflation rate (not price level) against output. This is not the usual AD curve concept, which links price level with output. To me, which aspect should be taught should not be based purely on authority, but on some carefully thought reasons. I hope that when the DSE syllabus is under review one day, the law of demand is given some explanations.
Thursday, 16 September 2021
Aggregate demand curve, why?
The economics syllabus in the DSE programme of Hong Kong requires textbooks and teachers to explain why aggregate demand (AD) curve is downward-sloping in macroeconomics. Furthermore, three reasons are cited: wealth effect, interest rate, and export.
To me, explaining why AD curve is downward-sloping is not an easy task, at least more complicated than explaining demand curve in microeconomics. But what DSE requires is the opposite: demand in micro is unexplained but AD in macro must be explained.
Even so, I support explaining to students for why AD takes certain shapes. As mentioned in my last post, scientists look for explanations. We should teach our students by taking this attitude seriously.
It should be explained is one issue. How it should be explained is another issue. The suggested three reasons cited above, to me, are rather complicated, not easy for explanation, and even (potentially) problematic for some of them. In particular, I think wealth effect is not a straightforward concept. If you ask me to explain it (properly) to high-school students, I would find it a difficult task.
To appreciate the difficulty involved in understanding wealth effect, one need only to know that this effect must be distinguished from the income effect that is mentioned in the last post. In other words, apart from income effect, there is another effect from price through wealth that affects the aggregate demand. This important point is perhaps not noticed by some textbook authors. I have read some books' explanation on wealth effect, which is essentially about income effect. But this is not so appropriate.
Why it is problematic to confuse income effect with wealth effect? This is because, on aggregate, there is no income effect! Why does income effect reduce demand when prices of goods are higher? If one has a fixed income, but the prices of goods are higher, this person can buy fewer goods with the same income. But this is an individual's case and a microeconomic aspect. For the whole society, if prices are higher, although buyers cannot buy more, sellers selling more expensive goods earn more. In other words, some people's income is higher (not fixed), and they may buy more goods. Hence, while some people may buy less, some people may buy more. Taken as a whole, there need not always be income effect from prices.
Thus, if we say prices on aggregate generate wealth effect, this effect must be something independent of the income effect conditional on a fixed income for everyone.
If wealth effect is a straightforward concept, more university textbooks should perhaps be willing to mention it. The concept seems to appear often in newspapers or non-technical economics reports (perhaps that's the reason why DSE syllabus requires teachers to teach it). But some serious textbooks choose to avoid this concept. I haven't read all macroeconomics university textbooks. However, the two most popular ones, Gregory Mankiw's Intermediate Macroeconomics and Olivier Blanchard's Macroeconomics, do not cover the term.
Although another textbook, Robert H. Frank and Ben S. Bernanke's Principles of Macroeconomics, has covered it, this book emphasizes intuitions instead of logical rigor, and so teaches in a style very much similar to DSE syllabus.
Would logically rigorous textbooks cover it? Interestingly, I find older textbooks like William Branson's Macroeconomic Theory and Policy and Rudiger Dornbusch and Stanley Fischer's Macroeconomics do cover. Both books introduce the term in the context of the life-cycle consumption theory as introduced by Albert Ando and Franco Modignianli (Nobel prize winner). To require high-school students to understand the life-cycle theory is not appropriate. Even if they are able to understand it, I would rather teach them other topics in macroeconomics.
Hence, what happen is: popular and rigorously written university textbooks avoid wealth effect. Meanwhile, a high-school syllabus explicitly suggest using it while avoiding the more intuitive explanation of law of demand in micro. I know there must be some (perhaps good) reasons behind this treatment. But if I can choose, I will not design the syllabus in this way.
To me, explaining why AD curve is downward-sloping is not an easy task, at least more complicated than explaining demand curve in microeconomics. But what DSE requires is the opposite: demand in micro is unexplained but AD in macro must be explained.
Even so, I support explaining to students for why AD takes certain shapes. As mentioned in my last post, scientists look for explanations. We should teach our students by taking this attitude seriously.
It should be explained is one issue. How it should be explained is another issue. The suggested three reasons cited above, to me, are rather complicated, not easy for explanation, and even (potentially) problematic for some of them. In particular, I think wealth effect is not a straightforward concept. If you ask me to explain it (properly) to high-school students, I would find it a difficult task.
To appreciate the difficulty involved in understanding wealth effect, one need only to know that this effect must be distinguished from the income effect that is mentioned in the last post. In other words, apart from income effect, there is another effect from price through wealth that affects the aggregate demand. This important point is perhaps not noticed by some textbook authors. I have read some books' explanation on wealth effect, which is essentially about income effect. But this is not so appropriate.
Why it is problematic to confuse income effect with wealth effect? This is because, on aggregate, there is no income effect! Why does income effect reduce demand when prices of goods are higher? If one has a fixed income, but the prices of goods are higher, this person can buy fewer goods with the same income. But this is an individual's case and a microeconomic aspect. For the whole society, if prices are higher, although buyers cannot buy more, sellers selling more expensive goods earn more. In other words, some people's income is higher (not fixed), and they may buy more goods. Hence, while some people may buy less, some people may buy more. Taken as a whole, there need not always be income effect from prices.
Thus, if we say prices on aggregate generate wealth effect, this effect must be something independent of the income effect conditional on a fixed income for everyone.
If wealth effect is a straightforward concept, more university textbooks should perhaps be willing to mention it. The concept seems to appear often in newspapers or non-technical economics reports (perhaps that's the reason why DSE syllabus requires teachers to teach it). But some serious textbooks choose to avoid this concept. I haven't read all macroeconomics university textbooks. However, the two most popular ones, Gregory Mankiw's Intermediate Macroeconomics and Olivier Blanchard's Macroeconomics, do not cover the term.
Although another textbook, Robert H. Frank and Ben S. Bernanke's Principles of Macroeconomics, has covered it, this book emphasizes intuitions instead of logical rigor, and so teaches in a style very much similar to DSE syllabus.
Would logically rigorous textbooks cover it? Interestingly, I find older textbooks like William Branson's Macroeconomic Theory and Policy and Rudiger Dornbusch and Stanley Fischer's Macroeconomics do cover. Both books introduce the term in the context of the life-cycle consumption theory as introduced by Albert Ando and Franco Modignianli (Nobel prize winner). To require high-school students to understand the life-cycle theory is not appropriate. Even if they are able to understand it, I would rather teach them other topics in macroeconomics.
Hence, what happen is: popular and rigorously written university textbooks avoid wealth effect. Meanwhile, a high-school syllabus explicitly suggest using it while avoiding the more intuitive explanation of law of demand in micro. I know there must be some (perhaps good) reasons behind this treatment. But if I can choose, I will not design the syllabus in this way.
Wednesday, 15 September 2021
The law of demand, but why?
I have recently met with a first-year student who has a fresh knowledge of high-school economics, and has not yet been affected by university teaching of economics (as the semester has just begun). He got 5** (the highest grade) in economics from DSE, the Hong Kong's high-school public exam. He can also answer questions in exactly the same way as what the textbook brought by him says. Hence, I trust what he says is what is taught in DSE economics.
To my surprise, I have learned from him that, in the DSE syllabus, there is no explanation given for why the demand curve of an individual good is downward-sloping. It simply says that this is the law of demand. By contrast, why aggregate demand curve is downward-sloping will be explained as required by the syllabus.
I do not think we should avoid explaining why demand curve is downward-sloping in microeconomics in high school. We may not need a complicated or technical explanation at high-school level. But we had better give some intuitive reasons. Furthermore, not explaining it in micro but explaining it in macro, to me, is odd.
The law of demand is a very important part in basic economics. If no explanation is given for this law, the syllabus misses something very important. Economics is a social science, and one primary task of science is to explain what happens. If you ask me simply to believe in something that is true, I will be very frustrated and doubt whether this is what a scientist normally would do. Of course, if we cannot explain something, honestly admitting this is still what a scientist should do. But obviously economics can explain the law of demand.
Perhaps one could argue further in this way: Science does not explain everything. At some point, you must accept that something are unexplained. If something must be unexplained, perhaps we can also choose which is to be explained and which is not to be explained (like what a mathematician chooses axioms). We can choose not to explain the law of demand but use the law as a basis to explain everything else.
I am not sure if this is the reason behind the DSE syllabus. If so, I think this is also not a good way to handle (delete) the explanation of the law of demand. First, I am not aware of anywhere else that will adopt this justification in designing high-school syllabus, especially this involves a rather non-straightforward methodological viewpoint. Second, though I know there may be a few economists holding a similar methodological viewpoint, this is not a viewpoint that most other economists in the world hold. Obviously, the global viewpoint (reflected in tremendous amount of textbooks) is that the law of demand can be explained and has been explained. I see no reason why a barely accepted methodological viewpoint should be accepted for designing high-school syllabus.
Given all these, I must say I do not think DSE should avoid explaining the law of demand.
Furthermore, if DSE syllabus designers think that aggregate demand can be explained at the high school level, they should also think that demand curve in micro can be explained. It is not more difficult to explain the micro demand curve. I will touch on aggregate demand later by writing another post. At the moment, I simply want to emphasize that explaining the law of demand never involves complicated highbrow technique, and there is already a standard answer, a universally accepted answer in university textbooks. What teachers need is only to explain the two reasons behind in intuitive terms (not in technical terms as in university textbook): substitution effect and income effect.
The idea is in fact quite intuitive. Any conscious consumer will buy goods with a goal to achieve (e.g. attaining certain level of satisfaction from consumption) and with a constraint restricting her choice (e.g. a fixed income for use in a period). If the price of a good (e.g. apple) falls (say, from $5 each to $4 each), other things (e.g. orange price at $5, income at $100) being equal, then one can spend less ($90 instead of $100) and can still buy the same basket of goods as before (e.g. 10 applies and 10 oranges a month). Given the same income ($100) as before, there is some money unspent ($10), and can be used for buying extra goods. Hence, although the consumer's income is unchanged (at $100), the consumer still has extra money ($10) for use (even if she buys the same basket of goods as before). The situation is equivalent to an increase in the consumer's income (by $10). Though her income is unchanged, the purchasing power of her income increases (when price of a good falls). This is the so called income effect.
How will income effect affect the quantity purchased? Normally, when income increases, individuals buy more goods. Thus, we expect she buys more apples due to the income effect (i.e. due to the extra money she can use even after buying the same basket of goods as before).
Meanwhile, a lower price of a good (apple) also generates a substitution effect. As we have mentioned, a conscious consumer buys goods with a goal to achieve. Different goods may help her achieve the same goal in a different manner. In this sense, goods are substitutes. For example, both apple and orange enables one to absorb similar nutrients. Though they are not perfect substitutes, and one apple is not exactly equivalent to one orange, they can be replaced by each other to a certain extent. People want to achieve the same goal at lowest cost. Thus, when apple price falls, a consumer will tend to replace (some) oranges by (some) apples. Doing so enables her to achieve her goal at a lower cost.
In other words, both income effect and substitution effect support the law of demand: when the price of a good falls, the quantity demanded of the good increases. The reason is as simple as this. When students move on to study economics in university, they can be taught the same reasons (substitution effect and income effect) using technical terms (e.g. utility) and with some variants or exceptions (e.g. Giffen goods). The case will become not very simple at that time but these need not be the concern of high schools. However, at the high-school level, the easier version (without technical terms) of the explanation should be understandable to students, and should not be avoided.
To my surprise, I have learned from him that, in the DSE syllabus, there is no explanation given for why the demand curve of an individual good is downward-sloping. It simply says that this is the law of demand. By contrast, why aggregate demand curve is downward-sloping will be explained as required by the syllabus.
I do not think we should avoid explaining why demand curve is downward-sloping in microeconomics in high school. We may not need a complicated or technical explanation at high-school level. But we had better give some intuitive reasons. Furthermore, not explaining it in micro but explaining it in macro, to me, is odd.
The law of demand is a very important part in basic economics. If no explanation is given for this law, the syllabus misses something very important. Economics is a social science, and one primary task of science is to explain what happens. If you ask me simply to believe in something that is true, I will be very frustrated and doubt whether this is what a scientist normally would do. Of course, if we cannot explain something, honestly admitting this is still what a scientist should do. But obviously economics can explain the law of demand.
Perhaps one could argue further in this way: Science does not explain everything. At some point, you must accept that something are unexplained. If something must be unexplained, perhaps we can also choose which is to be explained and which is not to be explained (like what a mathematician chooses axioms). We can choose not to explain the law of demand but use the law as a basis to explain everything else.
I am not sure if this is the reason behind the DSE syllabus. If so, I think this is also not a good way to handle (delete) the explanation of the law of demand. First, I am not aware of anywhere else that will adopt this justification in designing high-school syllabus, especially this involves a rather non-straightforward methodological viewpoint. Second, though I know there may be a few economists holding a similar methodological viewpoint, this is not a viewpoint that most other economists in the world hold. Obviously, the global viewpoint (reflected in tremendous amount of textbooks) is that the law of demand can be explained and has been explained. I see no reason why a barely accepted methodological viewpoint should be accepted for designing high-school syllabus.
Given all these, I must say I do not think DSE should avoid explaining the law of demand.
Furthermore, if DSE syllabus designers think that aggregate demand can be explained at the high school level, they should also think that demand curve in micro can be explained. It is not more difficult to explain the micro demand curve. I will touch on aggregate demand later by writing another post. At the moment, I simply want to emphasize that explaining the law of demand never involves complicated highbrow technique, and there is already a standard answer, a universally accepted answer in university textbooks. What teachers need is only to explain the two reasons behind in intuitive terms (not in technical terms as in university textbook): substitution effect and income effect.
The idea is in fact quite intuitive. Any conscious consumer will buy goods with a goal to achieve (e.g. attaining certain level of satisfaction from consumption) and with a constraint restricting her choice (e.g. a fixed income for use in a period). If the price of a good (e.g. apple) falls (say, from $5 each to $4 each), other things (e.g. orange price at $5, income at $100) being equal, then one can spend less ($90 instead of $100) and can still buy the same basket of goods as before (e.g. 10 applies and 10 oranges a month). Given the same income ($100) as before, there is some money unspent ($10), and can be used for buying extra goods. Hence, although the consumer's income is unchanged (at $100), the consumer still has extra money ($10) for use (even if she buys the same basket of goods as before). The situation is equivalent to an increase in the consumer's income (by $10). Though her income is unchanged, the purchasing power of her income increases (when price of a good falls). This is the so called income effect.
How will income effect affect the quantity purchased? Normally, when income increases, individuals buy more goods. Thus, we expect she buys more apples due to the income effect (i.e. due to the extra money she can use even after buying the same basket of goods as before).
Meanwhile, a lower price of a good (apple) also generates a substitution effect. As we have mentioned, a conscious consumer buys goods with a goal to achieve. Different goods may help her achieve the same goal in a different manner. In this sense, goods are substitutes. For example, both apple and orange enables one to absorb similar nutrients. Though they are not perfect substitutes, and one apple is not exactly equivalent to one orange, they can be replaced by each other to a certain extent. People want to achieve the same goal at lowest cost. Thus, when apple price falls, a consumer will tend to replace (some) oranges by (some) apples. Doing so enables her to achieve her goal at a lower cost.
In other words, both income effect and substitution effect support the law of demand: when the price of a good falls, the quantity demanded of the good increases. The reason is as simple as this. When students move on to study economics in university, they can be taught the same reasons (substitution effect and income effect) using technical terms (e.g. utility) and with some variants or exceptions (e.g. Giffen goods). The case will become not very simple at that time but these need not be the concern of high schools. However, at the high-school level, the easier version (without technical terms) of the explanation should be understandable to students, and should not be avoided.
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