harcourt brace & company chapter 2 thinking like an economist
TRANSCRIPT
Harcourt Brace & Company
Thinking Like an Economist
• The economic way of thinking requires
one to think analytically and
objectively.
• The economic way of thinking is like
the Scientific Method.
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The Economic Way of Thinking
• The Scientific Method uses abstract models to help understand how a complex real-world operates.
• The Scientific Method develops theory, collects and analyzes data to prove the theory.
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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
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Microeconomics and Macroeconomics
• Microeconomics focuses on “the individual parts of the economy.”– product markets or groups of people
• Macroeconomics looks at the “economy as a whole.”– aggregate of the micro- parts
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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.
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Positive versus Normative Analysis
• Positive: Statements or assertions dealing with matters of fact or questions about how things are (descriptive analysis).
• Normative: Statements that reflect individual opinions (prescriptive analysis).
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Positive or Normative Statements?
• The unemployment rate in the U.S. in July 2002 was 5.9 percent.
• Higher federal budget deficits will cause interest rates to increase.
• The income gains from a higher minimum wage are worth more than any slight reduction in employment.
• High income individuals should be taxed at a higher rate to provide more social benefits to the low income.
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Economists Do Not Always Agree
• Disagree about the validity of
alternative positive theories
• Disagreement over the statistical
evidence
• Each have different values, thus
different normative views
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Examples of When Economists (Majority) Do Agree. . (Table 2-2, p. 33)
• A ceiling on rents reduces the quantity
and quality of housing available.
• Tariffs and import quotas usually
reduce general economic welfare.
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A First Model: The Circular Flow Model
• Provides a simple way of organizing all the economic transactions that occur between households and firms in the economy. See Figure 2-1 in text.
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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. (see Figure 2-2)
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Principles of Economics Illustrated by the Production Possibilities Frontier . . .
• Efficiency• Tradeoffs• Opportunity Cost• Economic Growth
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Production Possibilities FrontierC
ars
1000
3000
700
2000
A
EfficientResource Use
Computers
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Production Possibilities FrontierC
ars
1000
3000
700
2000
Tradeoffs
Computers
300
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Opportunity Cost
• To gain an additional 800 computers, 400 cars must be given up.
• Opportunity cost is defined as “whatever must be given up to obtain some item”