1. Harcourt Brace & Company Chapter 2 Thinking Like an Economist

2. 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.

3. 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.

4. 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

5. 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

6. 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.

7. 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).

8. 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.

9. 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

10. 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.

11. 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.

12. 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)

13. Harcourt Brace & Company Principles of Economics Illustrated by the Production Possibilities Frontier... Efficiency Tradeoffs Opportunity Cost Economic Growth

14. Harcourt Brace & Company Production Possibilities Frontier Cars Computers

15. Harcourt Brace & Company Production Possibilities Frontier Cars Computers

16. Harcourt Brace & Company Production Possibilities Frontier Cars 1000 3000 Computers

17. Harcourt Brace & Company Production Possibilities Frontier Cars 1000 3000 700 Computers

18. Harcourt Brace & Company Production Possibilities Frontier Cars 1000 3000 700 2000 Computers

19. Harcourt Brace & Company Production Possibilities Frontier Cars 1000 3000 700 2000 A Efficient Resource Use Computers

20. Harcourt Brace & Company Production Possibilities Frontier Cars 1000 3000 700 2000 Computers

21. Harcourt Brace & Company Production Possibilities Frontier Cars 1000 3000 700 2000 Computers

22. Harcourt Brace & Company Production Possibilities Frontier Cars 1000 3000 700 2000 Computers

23. Harcourt Brace & Company Production Possibilities Frontier Cars 1000 3000 700 2000 Tradeoffs Computers 300

24. 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”

25. Harcourt Brace & Company Production Possibilities Frontier Cars 1000 3000 Computers

26. Harcourt Brace & Company Production Possibilities Frontier Cars 1000 3000 Computers

27. Harcourt Brace & Company Production Possibilities Frontier Cars 1000 3000 Growth Computers