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Thinking Like An Economist: Rgfrancisco

Thinking Like An Economist

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Zier Solomon
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45 views

Thinking Like An Economist: Rgfrancisco

Thinking Like An Economist

Uploaded by

Zier Solomon
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPT, PDF, TXT or read online on Scribd
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Lecture 3

Thinking Like an
Economist RGFrancisco
Thinking Like an Economist
 Every field of study has its own
terminology
 Mathematics
 integrals  axioms  vector
spaces
 Psychology
 ego  id  cognitive dissonance
 Law
 promissory  estoppel  torts 
venues
 Economics
 supply  opportunity cost 
elasticity  consumer surplus 
demand  comparative
advantage  deadweight loss
Thinking Like an Economist
 Economics trains you to. . . .
 Think in terms of alternatives.
 Evaluate the cost of individual and social choices.
 Examine and understand how certain events and
issues are related.
THE ECONOMIST AS A
SCIENTIST
 The economic
way of thinking . .
.
 Involvesthinking
analytically and
objectively.
 Makes use of the
scientific method.
Scientific Method in the Empirical
Testing of an Economic Theory
 State the propositions that are taken as given and do not
need further investigation, as the basic starting point of
investigation.
 Observe facts in connection with the activity we want to
theorize.
 Apply the rules of logic to the observed facts determine
causal relationships between observed factors and to
eliminate facts that are unnecessary and irrelevant.
 Establish a set principles such that formulated hypotheses
may be tested as to whether they are valid or not
 Use statistics and econometrics as empirical proof in testing
the hypotheses
The Scientific Method:
Observation, Theory, and More
Observation
 Uses abstract models to
help explain how a
complex, real world
operates.

 Develops theories,
collects, and analyzes
data to evaluate the
theories.
The Role of Assumptions

 Economists make assumptions in order to


make the world easier to understand.
 The art in scientific thinking is deciding which
assumptions to make.
 Economists use different assumptions to
answer different questions.
Economic Models

 Economists use models to simplify reality in


order to improve our understanding of the
world
 Two of the most basic economic models
include:
 The Circular Flow Diagram
 The Production Possibilities Frontier
Our First Model: The Circular-Flow
Diagram

 The circular-flow diagram is a visual


model of the economy that shows how dollars
flow through markets among households and
firms.
Figure 1 The Circular Flow

MARKETS
Revenue FOR Spending
GOODS AND SERVICES
Goods •Firms sell Goods and
and services •Households buy services
sold bought

FIRMS HOUSEHOLDS
•Produce and sell •Buy and consume
goods and services goods and services
•Hire and use factors •Own and sell factors
of production of production

Factors of MARKETS Labor, land,


production FOR and capital
FACTORS OF PRODUCTION
Wages, rent, •Households sell Income
and profit •Firms buy
= Flow of inputs
and outputs
= Flow of dollars

Copyright © 2004 South-Western


Our First Model: The Circular-Flow
Diagram

 Firms
 Produce and sell goods and services
 Hire and use factors of production
 Households
 Buy and consume goods and services
 Own and sell factors of production
Our First Model: The Circular-Flow
Diagram

 Markets for Goods and Services


 Firms sell
 Households buy
 Markets for Factors of Production
 Households sell
 Firms buy
Our First Model: The Circular-Flow
Diagram

 Factors of Production
 Inputs used to produce goods and services
 Land, labor, and capital
Our Second Model: The
Production Possibilities Frontier

 The production possibilities frontier is a


graph that shows the combinations of output that
the economy can possibly produce given the
available factors of production and the available
production technology.
Quantity of
Computers
Produced

3,000 D

C
2,200
2,000 A
Production
possibilities
frontier
1,000 B

0 300 600 700 1,000


Quantity of
Phones
Our Second Model: The
Production Possibilities Frontier

 Concepts Illustrated by the Production


Possibilities Frontier
 Efficiency
 Tradeoffs
 Opportunity Cost
 Economic Growth
Quantity of
Laptops
Produced

4,000

3,000

2,100 E
2,000
A

0 700 750 1,000


Quantity of
Cellphones
Microeconomics and
Macroeconomics

 Microeconomics focuses on the individual


parts of the economy.
 How households and firms make decisions and how
they interact in specific markets

 Macroeconomics looks at the economy as


a whole.
 Economy-wide phenomena, including inflation,
unemployment, and economic growth
THE ECONOMIST AS
POLICY ADVISOR
 When economists are trying to explain the world,
they are scientists.
 When economists are trying to change the world,
they are policy advisor.
POSITIVE VERSUS NORMATIVE
ANALYSIS
 Positive
statements are
statements that attempt
to describe the world as it
is.
 Called descriptive
analysis

 Normative
statements are
statements about how
the world should be.
 Called prescriptive
analysis
POSITIVE VERSUS
NORMATIVE ANALYSIS
 Positive or Normative Statements?
?
 An increase in the minimum wage will cause a
decrease in employment among the least-skilled.
POSITIVE

?  Higher federal budget deficits will cause interest


rates to increase.
POSITIVE

?
POSITIVE VERSUS
NORMATIVE ANALYSIS
 Positive or Normative Statements?
?
 The income gains from a higher minimum wage are
worth more than any slight reductions in
employment.
NORMATIVE

?  State governments should be allowed to collect


from tobacco companies the costs of treating
smoking-related illnesses among the poor.
NORMATIVE
?
Economists in Washington

 . . . serve as advisers in the policymaking process


of the three branches of government:
 Legislative
 Executive
 Judicial
Economists in Washington

 Some government agencies that collect


economic data and make economic policy:
 Department of Commerce
 http://www.commerce.gov
 Bureau of Labor Statistics
 http://www.bls.gov
 Congressional Budget Office
 http://www.cbo.gov
 Federal Reserve Board
 http://www.federalreserve.gov
WHY ECONOMISTS
DISAGREE
 They may disagree about the validity of
alternative positive theories about how the world
works.

 They may have different values and, therefore,


different normative views about what policy
should try to accomplish.
Table 2 Ten Propositions about Which Most
Economists Agree

Copyright © 2004 South-Western


Summary

 Economists try to address their subjects with a


scientist’s objectivity.
 They make appropriate assumptions and build
simplified models in order to understand the world
around them.
 Two simple economic models are the circular-flow
diagram and the production possibilities frontier.
Summary

 Economics is divided into two subfields:


 Microeconomists study decisionmaking by
households and firms in the marketplace.
 Macroeconomists study the forces and trends that
affect the economy as a whole
Summary

 A positive statement is an assertion about how the


world is.
 A normative statement is an assertion about how
the world ought to be.
 When economists make normative statements,
they are acting more as policy advisors than
scientists.
Summary

 Economists who advise policymakers offer


conflicting advice either because of differences
in scientific judgments or because of differences
in values.
 At other times, economists are united in the
advice they offer, but policymakers may choose
to ignore it.

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