Harcourt Brace & Company Chapter 2 Thinking Like an Economist

Harcourt Brace & Company Thinking Like an Economist u The economic way of thinking requires one to think analytically and objectively. u The economic way of thinking is like the Scientific Method.

Harcourt Brace & Company 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.

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

Harcourt Brace & Company The Circular Flow Model u Provides a simple way of organizing all the economic transactions that occur between households and firms in the economy. u Helps to illustrate our economy in two different sectors for anaylsis... Microeconomics and Macroeconomics

Harcourt Brace & Company Microeconomics and Macroeconomics u Microeconomics focuses on “the individual parts of the economy.” –like looking through a microscope at the economy u Macroeconomics looks at the “economy as a whole.” –like looking through a telescope at the economy

Harcourt Brace & Company The Circular-Flow Diagram. Households Businesses Market for Factors of Production Product Market

Harcourt Brace & Company The Circular-Flow Diagram. Households Businesses Market for Factors of Production Product Market The Flow of Goods and Services

Harcourt Brace & Company The Circular-Flow Diagram. Households Businesses Market for Factors of Production Product Market The Flow of Dollars $ $ $ $

Harcourt Brace & Company The Circular-Flow Diagram. Households Businesses Market for Factors of Production Product Market $ $ $ $

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.

Harcourt Brace & Company Production Possibilities Frontier Cars Computers

Harcourt Brace & Company Production Possibilities Frontier Cars Computers

Harcourt Brace & Company Production Possibilities Frontier Cars Computers

Harcourt Brace & Company Production Possibilities Frontier Cars Computers

Harcourt Brace & Company Production Possibilities Frontier Cars A Efficient Resource Use Computers

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

Harcourt Brace & Company Production Possibilities Frontier Cars Computers

Harcourt Brace & Company Production Possibilities Frontier Cars Computers

Harcourt Brace & Company Production Possibilities Frontier Cars Computers

Harcourt Brace & Company Production Possibilities Frontier Cars Tradeoffs Computers

Harcourt Brace & Company Production Possibilities Frontier Cars Computers

Harcourt Brace & Company Production Possibilities Frontier Cars Computers

Harcourt Brace & Company Production Possibilities Frontier Cars Growth Computers

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.

Harcourt Brace & Company Positive versus Normative Analysis u Positive: Statements fact or how things are (descriptive analysis). u Normative: Statements that reflect individual opinions (prescriptive analysis).

Harcourt Brace & Company 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 State governments should be allowed to collect from tobacco companies the costs of treating smoking related illnesses among the poor.

Harcourt Brace & Company 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

Harcourt Brace & Company Examples of When Economists (Majority) Do Agree... (Table 2-1) u A ceiling on rents reduces the quantity and quality of housing available. u Tariffs and import quotas usually reduce general economic welfare.