THINKING LIKE AN ECONOMIST. In This Chapter... Economics trains you to... Intro Maroeconomic Theory, Chapter 2 Professor Minseong Kim 9/7.

Transcription

1 THINKING LIKE AN ECONOMIST Chapter 2 In This Chapter... Scientific Methods economics uses Circular Flow Diagram Production Possibilities Frontier Positive vs. Normative analysis Disagreement among economists Economics trains you to.... Think in terms of alternatives. Understand the cost of individual and social choices. See how certain events and issues are related. 1

2 Thinking Like an Economist The economic way of thinking... Involves thinking analytically and objectively. Is like the scientific method. The Scientific Method Uses abstract models to help explain how a complex, real world operates. Develops theories, collects, and analyzes data to prove the theories. The Circular-Flow Model The circular-flow model is a simple way to visually show the economic transactions that occur between households and firms in the economy. 2

3 The Circular-Flow Diagram Market for Goods and Services Revenue Goods and services sold Goods and services bought Spending Firms Households Wage, rent, and profit Inputs for production Labor, land and capital Income Market for Factors of Production The Production Possibilities Frontier The production possibilities frontier is a graph showing the various combinations of output that the economy can possibly produce given the available factors of production and technology. The Production Possibilities Frontier Computers Produced 3,000 D 2,200 2,000 C A 1,000 B Production possibilities frontier ,000 Cars Produced 3

4 Ideas Illustrated by the Production Possibilities Frontier Efficiency Tradeoffs Opportunity Cost Economic Growth The Production Possibilities Frontier Computers Produced 4,000 3,000 2,100 2,000 A E ,000 Cars Produced 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. 4

5 Positive versus Normative Analysis Positive statements are statements that describe the world as it is. Called descriptive analysis Normative statements are statements about how the world should be. Called prescriptive analysis Positive or Normative Statements? An increase in the minimum wage will cause a decrease in employment among the least-skilled. Higher federal budget deficits will cause interest rates to increase. Positive or Normative Statements? The income gains from a higher minimum wage are worth more than any slight reductions in employment. State governments should be allowed to collect from tobacco companies the costs of treating smoking-related illnesses among the poor. 5

6 Economists in Washington serve as advisors in the policymaking process of the three branches of government. Legislative Executive Judicial Why Economists Disagree They may disagree on theories about how the world works. They may hold different values and, thus, different normative views. The advice of charlatans or cranks may obscure the consensus. Examples of What Most Economists Agree On A ceiling on rents reduces the quantity and quality of housing available. Tariffs and import quotas usually reduce general economic welfare. 6

7 Conclusion Economics uses the scientific method. Economics relies on both positive and normative analysis. Economists may disagree on certain issues depending on their values and understanding of how the economy works. THINKING LIKE AN ECONOMIST End of Chapter 2 7