Chapter 1 The Economic Way of Thinking Section 4 The Economists Toolbox

The Economists Toolbox Section-4 The Economists Toolbox Working with Data KEY CONCEPTS Statistics — numerical data or information — show patterns of human behavior Economic models help organize and interpret data

Working with Data Using Charts and Tables Using Graphs Economists look for statistical relationships, trends, connections Charts and tables display data in rows and columns — can reveal patterns by showing numbers in relation to other numbers Using Graphs Graphs use two sets of variables: along horizontal, vertical axes Line graphs useful for showing changes over time — in economics, line referred to as a curve, even if straight Bar graphs good for showing comparisons Pie graph (or pie chart, circle graph) shows numbers in relation to whole Using Economic Models Economic models focus on a limited number of variables — thus based on assumptions and use simplification — expressed in words, graphs, equations

Microeconomics and Macroeconomics KEY CONCEPTS Microeconomics — studies behavior of individual players in an economy — includes individuals, families, businesses Macroeconomics — studies behavior of economy as a whole — topics include inflation, unemployment, aggregate demand and aggregate supply

Positive Economics and Normative Economics KEY CONCEPTS Positive economics — describes and explains economic behavior as it is — uses verifiable facts; does not make judgments Normative economics — studies what economic behavior should be — makes value judgments to recommend future actions

Positive Economics and Normative Economics Positive economics uses scientific method — observe data, hypothesize, test, refine, continue testing Statements tested against real-world data — proved (or strongly supported) or disproved (or strongly questioned)

Positive Economics and Normative Economics Normative economics studies facts, asks if course of action is good Recommendations differ because values they are based on also differ

Adam Smith: Founder of Modern Economics Seeing the Invisible An Inquiry into the Nature and Causes of the Wealth of Nations, 1776 — challenged mercantilism; argued for free trade Invisible hand guides free marketplace, benefits sellers and buyers — people pursue own economic self-interest — producers sell at prices that satisfy them and that consumers will pay