1、Copyright 2004 South-Western/Thomson LearningThinking Like an EconomistCopyright 2004 South-Western/Thomson LearningThinking Like an Economist Every field of study has its own terminology Mathematics Integrals,axioms,vector spaces Psychology Ego,id,cognitive dissonance Law Promissory,estoppel,torts,
2、venues Economics Supply,opportunity cost,elasticity,consumer surplus,demand,comparative advantage,deadweight lossCopyright 2004 South-Western/Thomson LearningThinking Like an Economist Economics trains you to.Think in terms of alternatives.Evaluate the cost of individual and social choices.Examine a
3、nd understand how certain events and issues are related.Copyright 2004 South-Western/Thomson LearningTHE ECONOMIST AS A SCIENTIST The economic way of thinking.Involves thinking analytically and objectively.Makes use of the scientific method.Copyright 2004 South-Western/Thomson LearningThe Scientific
4、 Method:Observation,Theory,and More Observation Uses abstract models to help explain how a complex,real world operates.Develops theories,collects,and analyzes data to evaluate the theories.Copyright 2004 South-Western/Thomson LearningThe Role of Assumptions Economists make assumptions in order to ma
5、ke the world easier to understand.The art in scientific thinking is deciding which assumptions to make.Economists use different assumptions to answer different questions.Copyright 2004 South-Western/Thomson LearningEconomic Models Economists use models to simplify reality in order to improve our und
6、erstanding of the world Two of the most basic economic models include:The Circular Flow Diagram The Production Possibilities FrontierCopyright 2004 South-Western/Thomson LearningOur First Model:The Circular-Flow Diagram The circular-flow diagram is a visual model of the economy that shows how dollar
7、s flow through markets among households and firms.Figure 1 The Circular FlowCopyright 2004 South-WesternSpendingGoods andservicesboughtRevenueGoodsand servicessoldLabor,land,and capitalIncome=Flow of inputs and outputs=Flow of dollarsFactors ofproductionWages,rent,and profit FIRMSProduce and sellgoo
8、ds and servicesHire and use factorsof production Buy and consumegoods and servicesOwn and sell factorsof productionHOUSEHOLDS Households sellFirms buyMARKETSFORFACTORS OF PRODUCTION Firms sellHouseholds buyMARKETSFORGOODS AND SERVICESCopyright 2004 South-Western/Thomson LearningOur First Model:The C
9、ircular-Flow Diagram Firms Produce and sell goods and services Hire and use factors of production Households Buy and consume goods and services Own and sell factors of productionCopyright 2004 South-Western/Thomson LearningOur First Model:The Circular-Flow Diagram Markets for Goods and Services Firm
10、s sell Households buy Markets for Factors of Production Households sell Firms buyCopyright 2004 South-Western/Thomson LearningOur First Model:The Circular-Flow Diagram Factors of Production Inputs used to produce goods and services Land,labor,and capitalCopyright 2004 South-Western/Thomson LearningO
11、ur Second Model:The Production Possibilities Frontier The production possibilities frontier is a graph that shows the combinations of output that the economy can possibly produce given the available factors of production and the available production technology.Figure 2 The Production Possibilities F
12、rontierCopyright2003 Southwestern/Thomson LearningProductionpossibilitiesfrontierABCQuantity ofCars Produced2,2006001,00030007002,0003,0001,000Quantity ofComputersProducedDCopyright 2004 South-Western/Thomson LearningOur Second Model:The Production Possibilities Frontier Concepts Illustrated by the
13、Production Possibilities Frontier Efficiency Tradeoffs Opportunity Cost Economic GrowthFigure 3 A Shift in the Production Possibilities FrontierCopyright 2004 South-WesternEQuantity ofCars Produced2,0007002,10075004,0003,0001,000Quantity ofComputersProducedACopyright 2004 South-Western/Thomson Learn
14、ingMicroeconomics and Macroeconomics Microeconomics focuses on the individual parts of the economy.How households and firms make decisions and how they interact in specific markets Macroeconomics looks at the economy as a whole.Economy-wide phenomena,including inflation,unemployment,and economic gro
15、wthCopyright 2004 South-Western/Thomson LearningPOSITIVE VERSUS NORMATIVE ANALYSIS Positive statements are statements that attempt to describe the world as it is.Called descriptive analysis Normative statements are statements about how the world should be.Called prescriptive analysisCopyright 2004 S
16、outh-Western/Thomson Learning Positive or Normative Statements?An increase in the minimum wage will cause a decrease in employment among the least-skilled.POSITIVE Higher federal budget deficits will cause interest rates to increase.POSITIVE?POSITIVE VERSUS NORMATIVE ANALYSIS?Copyright 2004 South-We
17、stern/Thomson Learning Positive or Normative Statements?The income gains from a higher minimum wage are worth more than any slight reductions in employment.NORMATIVE State governments should be allowed to collect from tobacco companies the costs of treating smoking-related illnesses among the poor.N
18、ORMATIVE?POSITIVE VERSUS NORMATIVE ANALYSIS?Copyright 2004 South-Western/Thomson Learning Positive statements:A rise in consumer incomes will lead to a rise in the demand for new cars.A fall in the exchange rate will lead to an increase in exports overseas.More competition in markets can lead to low
19、er prices for consumers.If the government raises the tax on beer,this will lead to a fall in profits of the brewers.Copyright 2004 South-Western/Thomson Learning Normative statements:The level of duty on petrol is too unfair and unfairly penalizes motorists.The London congestion charge for drivers o
20、f petrol-guzzling cars should increase to 25-three times the current charge.The government should increase the national minimum wage to 6 per hour in order to reduce relative poverty.The government is right to introduce a ban on smoking in public places.Copyright 2004 South-Western/Thomson LearningW
21、HY ECONOMISTS DISAGREE They may disagree about the validity of alternative positive theories about how the world works.They may have different values and,therefore,different normative views about what policy should try to accomplish.Copyright 2004 South-Western/Thomson LearningSummary Economists try
22、 to address their subjects with a scientists objectivity.They make appropriate assumptions and build simplified models in order to understand the world around them.Two simple economic models are the circular-flow diagram and the production possibilities frontier.Copyright 2004 South-Western/Thomson
23、LearningSummary Economics is divided into two subfields:Microeconomists study decisionmaking by households and firms in the marketplace.Macroeconomists study the forces and trends that affect the economy as a wholeCopyright 2004 South-Western/Thomson LearningSummary A positive statement is an assert
24、ion about how the world is.A normative statement is an assertion about how the world ought to be.When economists make normative statements,they are acting more as policy advisors than scientists.Copyright 2004 South-Western/Thomson LearningSummary Economists who advise policymakers offer conflicting advice either because of differences in scientific judgments or because of differences in values.At other times,economists are united in the advice they offer,but policymakers may choose to ignore it.
