1、Thinking Like an EconomistChapter 2Copyright 2001 by Harcourt,Inc.All rights reserved.Requests for permission to make copies of any part of thework should be mailed to:Permissions Department,Harcourt College Publishers,6277 Sea Harbor Drive,Orlando,Florida 32887-6777.Harcourt,Inc.items and derived i
2、tems copyright 2001 by Harcourt,Inc.Every field of study has its own terminologyMathematicsaxiomsintegralsvector spacesPsychologyegoidcognitive dissonanceLawtortsvenuesPromissory estoppelHarcourt,Inc.items and derived items copyright 2001 by Harcourt,Inc.Every field of study has its own terminologyE
3、conomicsSupplyDemandElasticityConsumer SurplusComparative advantageOpportunity costDeadweight lossHarcourt,Inc.items and derived items copyright 2001 by Harcourt,Inc.Economics trains you to.uThink in terms of alternatives.uEvaluate the cost of individual and social choices.uExamine and understand ho
4、w certain events and issues are related.Harcourt,Inc.items and derived items copyright 2001 by Harcourt,Inc.The Economist as a ScientistThe economic way of thinking.uInvolves thinking analytically and objectively.uMakes use of the scientific method.Harcourt,Inc.items and derived items copyright 2001
5、 by Harcourt,Inc.The Scientific MethoduUses abstract models to help explain how a complex,real world operates.uDevelops theories,collects,and analyzes data to prove the theories.Observation,Theory and More Observation!Harcourt,Inc.items and derived items copyright 2001 by Harcourt,Inc.The Role of As
6、sumptionsu Economists make assumptions in order to make the world easier to understand.u The art in scientific thinking is deciding which assumptions to make.u Economists use different assumptions to answer different questions.Harcourt,Inc.items and derived items copyright 2001 by Harcourt,Inc.The E
7、conomic Way of ThinkinguIncludes developing abstract models from theories and the analysis of the models.uUses two approaches:uDescriptive(reporting facts,etc.)uAnalytical(abstract reasoning)Harcourt,Inc.items and derived items copyright 2001 by Harcourt,Inc.Economic Modelsu Economists use models to
8、 simplify reality in order to improve our understanding of the worldu Two of the most basic economic models include:uThe Circular Flow ModeluThe Production Possibilities FrontierHarcourt,Inc.items and derived items copyright 2001 by Harcourt,Inc.The Circular-Flow ModelThe circular-flow model is a si
9、mple way to visually show the economic transactions that occur between households and firms in the economy.Harcourt,Inc.items and derived items copyright 2001 by Harcourt,Inc.The Circular-Flow DiagramFirmsHouseholdsMarket for Factors of ProductionMarket for Goods and ServicesSpendingRevenueWages,ren
10、t,and profitIncomeGoods&Services soldGoods&Services boughtLabor,land,and capitalInputs for productionHarcourt,Inc.items and derived items copyright 2001 by Harcourt,Inc.The Circular-Flow DiagramHouseholdsu Buy and consume goods and servicesu Own and sell factors of productionFirmsu Produce and sell
11、goods and servicesu Hire and use factors of productionHarcourt,Inc.items and derived items copyright 2001 by Harcourt,Inc.The Circular-Flow DiagramMarkets for Factors of Productionu Households sellu Firms buyMarkets for Goods&Servicesu Firms sellu Households buyHarcourt,Inc.items and derived items c
12、opyright 2001 by Harcourt,Inc.The Circular-Flow DiagramFactors of Productionu Inputs used to produce goods and servicesu Land,labor,and capitalHarcourt,Inc.items and derived items copyright 2001 by Harcourt,Inc.The Production Possibilities FrontierThe production possibilities frontier is a graph sho
13、wing the various combinations of output that the economy can possibly produce given the available factors of production and technology.Harcourt,Inc.items and derived items copyright 2001 by Harcourt,Inc.The Production Possibilities FrontierQuantity ofComputersProducedQuantity ofCars Produced3,00001,
14、0002,0007001,000300AB2,200600CDHarcourt,Inc.items and derived items copyright 2001 by Harcourt,Inc.The Production Possibilities FrontierQuantity ofComputersProducedQuantity ofCars Produced3,0001,0002,0002,200A70060030001,000BCDProductionpossibilitiesfrontierHarcourt,Inc.items and derived items copyr
15、ight 2001 by Harcourt,Inc.Concepts Illustrated by the Production Possibilities FrontieruEfficiencyuTradeoffsuOpportunity CostuEconomic GrowthHarcourt,Inc.items and derived items copyright 2001 by Harcourt,Inc.4,000The Production Possibilities FrontierQuantity of ComputersProducedQuantity ofCars Prod
16、uced3,0002,000A70001,000E2,100750An outward shift in the production possibilities frontierHarcourt,Inc.items and derived items copyright 2001 by Harcourt,Inc.Microeconomics and MacroeconomicsuMicroeconomics focuses on the individual parts of the economy.uHow households and firms make decisions and h
17、ow they interact in specific marketsuMacroeconomics looks at the economy as a whole.uHow the markets,as a whole,interact at the national level.Harcourt,Inc.items and derived items copyright 2001 by Harcourt,Inc.Two Roles of EconomistsuWhen they are trying to explain the world,they are scientists.uWh
18、en they are trying to change the world,they are policymakers.Harcourt,Inc.items and derived items copyright 2001 by Harcourt,Inc.Positive versus Normative AnalysisuPositive statements are statements that describe the world as it is.uCalled descriptive analysisuNormative statements are statements abo
19、ut how the world should be.uCalled prescriptive analysisHarcourt,Inc.items and derived items copyright 2001 by Harcourt,Inc.?Positive or Normative Statements?An increase in the minimum wage will cause a decrease in employment among the least-skilled.Harcourt,Inc.items and derived items copyright 200
20、1 by Harcourt,Inc.?Positive or Normative Statements?Higher federal budget deficits will cause interest rates to increase.Harcourt,Inc.items and derived items copyright 2001 by Harcourt,Inc.?Positive or Normative Statements?The income gains from a higher minimum wage are worth more than any slight re
21、ductions in employment.Harcourt,Inc.items and derived items copyright 2001 by Harcourt,Inc.?Positive or Normative Statements?State governments should be allowed to collect from tobacco companies the costs of treating smoking-related illnesses among the poor.Harcourt,Inc.items and derived items copyr
22、ight 2001 by Harcourt,Inc.Economists in Washington.serve as advisers in the policymaking process of the three branches of government:uLegislativeuExecutiveuJudicialHarcourt,Inc.items and derived items copyright 2001 by Harcourt,Inc.Why Economists DisagreeuThey may disagree on theories about how the
23、world works.uThey may hold different values and,thus,different normative views.Harcourt,Inc.items and derived items copyright 2001 by Harcourt,Inc.Examples of What Most Economists Agree OnuA ceiling on rents reduces the quantity and quality of housing available.uTariffs and import quotas usually red
24、uce general economic welfare.Harcourt,Inc.items and derived items copyright 2001 by Harcourt,Inc.SummaryuIn order to address subjects with objectivity,economics makes use of the scientific method.uThe field of economics is divided into two subfields:microeconomics and macroeconomics.Harcourt,Inc.ite
25、ms and derived items copyright 2001 by Harcourt,Inc.SummaryuEconomics relies on both positive and normative analysis.Positive statements assert how the world“is”while normative statements assert how the world“should be.”uEconomists may offer conflicting advice due to differences in scientific judgme
26、nts or to differences in values.Harcourt,Inc.items and derived items copyright 2001 by Harcourt,Inc.Graphical ReviewHarcourt,Inc.items and derived items copyright 2001 by Harcourt,Inc.The Circular-Flow DiagramFirmsHouseholdsMarket for Factors of ProductionMarket for Goods and ServicesSpendingRevenue
27、Wages,rent,and profitIncomeLabor,land,and capitalInputs for productionGoods&Services soldGoods&Services boughtHarcourt,Inc.items and derived items copyright 2001 by Harcourt,Inc.The Production Possibilities FrontierQuantity ofComputersProducedQuantity ofCars Produced3,00001,0002,0007001,000300AB2,20
28、0600CDHarcourt,Inc.items and derived items copyright 2001 by Harcourt,Inc.The Production Possibilities FrontierQuantity ofComputersProducedQuantity ofCars Produced3,0001,0002,0002,200A70060030001,000BCDProductionpossibilitiesfrontierHarcourt,Inc.items and derived items copyright 2001 by Harcourt,Inc.The Production Possibilities Frontier4,000Quantity of ComputersProducedQuantity ofCars Produced3,0002,000A70001,000E2,100750An outward shift in the production possibilities frontier
