1. Thinking Like an Economist
Economics trains us to think in terms of alternatives, cost of choices, and provides insights on how certain issues are related
Economists think both like scientists and policy makers.
The Economist as a scientist uses the scientific method (observation, theory, and more observation)
Similar to science interplay between theory and observation occurs in economics
Any problems with this approach ???

2. Thinking Like an Economist
Economic scientists observe and study the effects of an occurrence; economic policy makers design a policy response to an occurrence
Economic policy makers/ policy advisors recommend policies to improve economic outcomes
Policy decisions are tough because of the trade-off between equity and efficiency.
Canadian Organizations that employ economists to give policy advice-???

3. Thinking Like an Economist
Two important techniques used:
Assumptions
Short-run and long-run assumptions
Economic models
The circular-flow diagram
The production possibilities frontier (PPF)

4. Model #1: The Circular-Flow Diagram
The model offers a simple way of organizing all the economic transactions that occur between all households and firms in the economy.
Economy has two types of decision-makers:
Households – consumers of goods and services
Firms – producers of goods and services
Households and firms interact in two types of markets:
Markets for goods & services
Markets for factors of production

5. Revenue
Markets for goods & services
Spending
Goods & services bought
Goods & services sold
Flow of goods & Services
Firms
Households
Flow of $
L, Land, K
Inputs for production
Markets for Factors of Production
W, R, and Profit
Income

6. Model #2: PPF
PPF shows the combinations of output that the economy can possibly produce given the available factors of production and given the available technology that can turn these factors into output.
PPF demonstrates the following economic principles
Scarcity
Efficiency
Trade-offs
Opportunity cost

7. Production Possibility Frontier
With given resources and technology
Unattainable
Quantity of
TVs
PPF
Attainable
Quantity of Stereos

8. Shifts in PPF
Technological advances in a particular industry can shift the PPF thus increasing the quantity of goods produced with the existing resources.
TVs produced
Stereos produced

9. Microeconomics and Macroeconomics
Microeconomics: the study of how households and firms make decisions and how they interact in markets
Macroeconomics: the study of economy-wide phenomena, including inflation, unemployment, and economic growth
Micro economics and macroeconomics are closely intertwined but the two fields are distinct

10. Positive and Normative Statements
Positive statements are descriptive in nature and are capable of being verified. They attempt to describe the world as it is.
Q: How does the economy work?
Normative statements are statements of what ought to be done. They attempt to prescribe how the world should be. It involves one’s values and ethics.
Q: How can we improve the working of the economy?

11. Why economists disagree?
Most disagreements between economists result from inconclusive empirical evidence or differences in individual values.
Disagree on the validity of positive theories about how the economy works (responsiveness of savings to taxes)
Each has different normative values giving rise to conflicting policy prescriptions (progressive taxation)
Political constraints (agricultural subsidies, rent control)