Lecture Notes: Econ 203 Introductory Microeconomics Lecture/Chapter 2: Economic thinking and practice M. Cary Leahey Manhattan College Fall 2012

The economist as social scientist Art versus science (Nobel prize example) Role of scientist, explaining the world Role of policy advisor, trying to improve it

Assumptions and models Assumptions to help simplify things (assume a can opener) Model: simple representation of complex reality-”ballpark”

Models: circular flow diagram Circular flow-visual model of economy Two types of economic actors: households and firms Two markets: goods and services and factors of production

FIGURE 1: The Circular-Flow Diagram Markets for Factors of Production Income Wages, rent, profit Factors of production Labor, land, capital Spending G & S bought G & S sold Revenue 5

Models: Production possibilities frontier (PPF) The PPF shows the combinations of 2 goods (x, y axis) that can be produced given available resources Review points along the PPF from Figure 2 PPF is possible and efficiency PPF and opportunity cost-shifting resources along the PPF Slope of PPF is the opportunity cost—the rise over the run

Point on graph Production Com- puters Wheat A5000 B4001,000 C2502,500 D1004,000 E05,000 A B C D E Figure 2: PPF Example 7

Models: Economic growth and the PPF Economic growth shifts the PPF outward Additional resources= additional output Shape of PPF shows how opportunity costs can change Straight PPF = same tradeoff Bowed PPF opportunity costs changes Steeper = higher opportunity cost Why= intensity of resource use

Micro versus macro Micro – study of individual firms and households Macro – study of aggregate activity More agreement on micro than macro basics

Economist as policy advisor Positive economics-world as it is Normative economics-would as it should be Positive statements can be refuted “scientific” Normative statement is a value judgment Many economist shy away from value judgments Where do economist do policy work? (Mankiw plug) Sources of disagreements are mainly on policy prescriptions, not bedrock economic concepts Who has studied economics; the list might surprise you (Tiger, the Terminator)

Summary Economists explain the world using models with built-in assumptions Two simple models are circular flow and the PPF Micro is the study of individual behavior; macro is on the aggregate Positive versus normative economics