Harcourt Brace & Company Chapter 2 Thinking Like an Economist
Harcourt Brace & Company Thinking Like an Economist The economic way of thinking requires one to think analytically and objectively. The economic way of thinking is like the Scientific Method.
Harcourt Brace & Company The Economic Way of Thinking The Scientific Method uses abstract models to help understand how a complex real-world operates. The Scientific Method develops theory, collects and analyzes data to prove the theory.
Harcourt Brace & Company The Economic Way of Thinking includes... … the development of abstract models from theories and the analysis of the models using two approaches: – descriptive: reporting facts, etc. – analytical: abstract reasoning
Harcourt Brace & Company Microeconomics and Macroeconomics Microeconomics focuses on “the individual parts of the economy.” – product markets or groups of people Macroeconomics looks at the “economy as a whole.” – aggregate of the micro- parts
Harcourt Brace & Company Two Roles of Economists... When they are trying to explain the world, they are Scientists. When they are trying to change the world they are Policymakers.
Harcourt Brace & Company Positive versus Normative Analysis Positive: Statements or assertions dealing with matters of fact or questions about how things are (descriptive analysis). Normative: Statements that reflect individual opinions (prescriptive analysis).
Harcourt Brace & Company Positive or Normative Statements? The unemployment rate in the U.S. in July 2002 was 5.9 percent. Higher federal budget deficits will cause interest rates to increase. The income gains from a higher minimum wage are worth more than any slight reduction in employment. High income individuals should be taxed at a higher rate to provide more social benefits to the low income.
Harcourt Brace & Company Economists Do Not Always Agree Disagree about the validity of alternative positive theories Disagreement over the statistical evidence Each have different values, thus different normative views
Harcourt Brace & Company Examples of When Economists (Majority) Do Agree.. (Table 2-2, p. 33) A ceiling on rents reduces the quantity and quality of housing available. Tariffs and import quotas usually reduce general economic welfare.
Harcourt Brace & Company A First Model: The Circular Flow Model Provides a simple way of organizing all the economic transactions that occur between households and firms in the economy. See Figure 2-1 in text.
Harcourt Brace & Company A Second Economic Model: Production Possibilities Frontier…. … is a graph that shows the various combinations of output that the economy can possibly produce given the available factors of production and technology. (see Figure 2-2)
Harcourt Brace & Company Principles of Economics Illustrated by the Production Possibilities Frontier... Efficiency Tradeoffs Opportunity Cost Economic Growth
Harcourt Brace & Company Production Possibilities Frontier Cars Computers
Harcourt Brace & Company Production Possibilities Frontier Cars Computers
Harcourt Brace & Company Production Possibilities Frontier Cars Computers
Harcourt Brace & Company Production Possibilities Frontier Cars Computers
Harcourt Brace & Company Production Possibilities Frontier Cars Computers
Harcourt Brace & Company Production Possibilities Frontier Cars A Efficient Resource Use Computers
Harcourt Brace & Company Production Possibilities Frontier Cars Computers
Harcourt Brace & Company Production Possibilities Frontier Cars Computers
Harcourt Brace & Company Production Possibilities Frontier Cars Computers
Harcourt Brace & Company Production Possibilities Frontier Cars Tradeoffs Computers 300
Harcourt Brace & Company Opportunity Cost To gain an additional 800 computers, 400 cars must be given up. Opportunity cost is defined as “whatever must be given up to obtain some item”
Harcourt Brace & Company Production Possibilities Frontier Cars Computers
Harcourt Brace & Company Production Possibilities Frontier Cars Computers
Harcourt Brace & Company Production Possibilities Frontier Cars Growth Computers