Principles of Microeconomics & Principles of Macroeconomics: Ch. 2 First Canadian Edition The Economic Way of Thinking u The Scientific Method uses abstract models to help understand how a complex real-world operates. u The Scientific Method develops theory, collects and analyzes data to prove the theory.

Principles of Microeconomics & Principles of Macroeconomics: Ch. 2 First Canadian Edition The Circular-Flow Model u Provides a simple way of describing all the economic transactions that occur in a Market Economy. u Emphasizes decentralization in that economic decisions are made by Households and Businesses in Product and Resource Markets.

Principles of Microeconomics & Principles of Macroeconomics: Ch. 2 First Canadian Edition Diagram: The Circular-Flow Model Households Businesses Product Markets $ $ $ $ Dollar Flow Real Flow Resource Markets

Principles of Microeconomics & Principles of Macroeconomics: Ch. 2 First Canadian Edition Microeconomics and Macroeconomics u Microeconomics focuses on “the individual parts of the economy.” –e.g. individual markets –e.g. price increase in the house market u Macroeconomics looks at the “economy as a whole.” –e.g. aggregate of markets –e.g. average price increase for all goods

Principles of Microeconomics & Principles of Macroeconomics: Ch. 2 First Canadian Edition 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.

Principles of Microeconomics & Principles of Macroeconomics: Ch. 2 First Canadian Edition Production Possibilities Frontier Computers A Cars E F

Principles of Microeconomics & Principles of Macroeconomics: Ch. 2 First Canadian Edition Production Possibilities Frontier Computers A Cars E F

Principles of Microeconomics & Principles of Macroeconomics: Ch. 2 First Canadian Edition Principles of Economics Illustrated by the Production Possibilities Frontier... u Efficiency u Tradeoffs u Opportunity Cost u Economic Growth

Principles of Microeconomics & Principles of Macroeconomics: Ch. 2 First Canadian Edition Efficient Resource Use Production Possibilities Frontier Computers A Cars E F 0 B?

Principles of Microeconomics & Principles of Macroeconomics: Ch. 2 First Canadian Edition Production Possibilities Frontier Computers A Cars E F C Tradeoffs

Principles of Microeconomics & Principles of Macroeconomics: Ch. 2 First Canadian Edition Production Possibilities Frontier Computers A Cars E F C Opportunity Cost of next 200 cars is 1000 computers. Opportunity cost of 1 car is 5 computers Opportunity Cost

Principles of Microeconomics & Principles of Macroeconomics: Ch. 2 First Canadian Edition Economic Growth Production Possibilities Frontier Computers Cars

Principles of Microeconomics & Principles of Macroeconomics: Ch. 2 First Canadian Edition Positive versus Normative Analysis u Positive: Statements or assertions dealing with matters of fact or questions about how things are (descriptive analysis). u Normative: Statements that reflect individual opinions (prescriptive analysis).

Principles of Microeconomics & Principles of Macroeconomics: Ch. 2 First Canadian Edition Positive or Normative Statements? u An increase in the minimum wage will cause a decrease in employment among the least skilled. u Higher federal budget deficits will cause interest rates to increase. u The income gains from a higher minimum wage are worth more than any slight reduction in employment. u Provincial governments should be allowed to collect from tobacco companies the costs of treating smoking-related illnesses among the poor.

Principles of Microeconomics & Principles of Macroeconomics: Ch. 2 First Canadian Edition Economists in Government... u Department of Finance - formulate tax policy. u Industry Canada - design competition policy. u Foreign Affairs - assist with trade agreements. u Human Resources Development Canada - formulate labour market policies. u Bank of Canada - implement monetary policy. u Environment Canada - design environmental policy.

Principles of Microeconomics & Principles of Macroeconomics: Ch. 2 First Canadian Edition Economists in the Private Sector... u C.D. Howe Institute - suggest policy options. u Fraser Institute - suggest policy options. u Provide forecasts for companies. u Assist firms manage resources efficiently. u Assist with investment decisions.

Principles of Microeconomics & Principles of Macroeconomics: Ch. 2 First Canadian Edition Do Economists Always Agree With Each Other? Three reasons why they don’t: À Disagree about the validity of alternative positive theories Á Each have different values, thus different normative views  Advice of charlatans or cranks complicates ability to agree

Principles of Microeconomics & Principles of Macroeconomics: Ch. 2 First Canadian Edition Thinking Like an Economist... u Economics uses the scientific approach. u Economics is divided into Microeconomics and Macroeconomics. u Economics is analyzed through both Positive and Normative statements.