Thinking Like Thinking Like an Economistan Economist

Economics trains you to. . . . Economics trains you to. . . .

Be mindful about the choices that Be mindful about the choices that you make.you make.

Evaluate the cost of individual and Evaluate the cost of individual and social choices.social choices.

Examine and understand how certain Examine and understand how certain events and issues are related.events and issues are related.

But there is the issue of terminology, But there is the issue of terminology, some math, and GRAPHS, GRAPHS some math, and GRAPHS, GRAPHS AND SOME MORE GRAPHS!AND SOME MORE GRAPHS!

The Economist as a ScientistThe Economist as a Scientist

The economic way of thinking . . .The economic way of thinking . . . Involves thinking analyticallyInvolves thinking analytically andand

objectively.objectively. Makes use of theMakes use of the scientific methodscientific method..

Involves the use of abstract models to focus Involves the use of abstract models to focus the discussion on a main idea or theme in the the discussion on a main idea or theme in the complexity of the real world.complexity of the real world.

To apply the scientific method in economics, To apply the scientific method in economics, assumptions are used to make the world easier to assumptions are used to make the world easier to understand.understand. Ceteris Paribus Assumption-All else equal.Ceteris Paribus Assumption-All else equal. Role Play Scenario-Purchasing something at a store.Role Play Scenario-Purchasing something at a store.

Economic ModelsEconomic Models Economists use models to simplify Economists use models to simplify reality in order to improve our reality in order to improve our understanding of the world.understanding of the world. As simplifications of reality, models As simplifications of reality, models need assumptions.need assumptions.

A Model of Boids FlyingA Model of Boids FlyingModels start small and then grow in Models start small and then grow in increasing complexity.increasing complexity.

Play Bolero by Maurice RavelPlay Bolero by Maurice Ravel

Graphing DataGraphing Data

A graph reveals a causal A graph reveals a causal relationship between relationship between two variables.two variables.

The vertical line is the The vertical line is the yy--axis.axis.

► Independent variable.Independent variable. The horizontal line is the The horizontal line is the

xx-axis.-axis.► Dependent variable.Dependent variable.

How do we show a How do we show a negative and a positive negative and a positive relationship between relationship between variables?variables?

Two Simple Rules for Two Simple Rules for Movements vs. ShiftsMovements vs. Shifts

►Rule OneRule One When an independent variable changes When an independent variable changes

and that variable does not appear on the and that variable does not appear on the graph, the curve on the graph will shift.graph, the curve on the graph will shift.

►Rule TwoRule Two When an independent variable changes When an independent variable changes

and does appear on the graph, a and does appear on the graph, a movement along the existing curve will movement along the existing curve will occur. The curve will not shift.occur. The curve will not shift.

Graphing DataGraphing Data

Economists use three types of graphs to Economists use three types of graphs to reveal relationships between variables. reveal relationships between variables. They are:They are:

Time-series graphsTime-series graphs Cross-section graphsCross-section graphs Scatter diagramsScatter diagrams

Two of the Most Basic Two of the Most Basic Economic Models AreEconomic Models Are

►The Circular Flow DiagramThe Circular Flow Diagram►The Production Possibilities Frontier.The Production Possibilities Frontier.

The Circular-Flow DiagramThe Circular-Flow Diagram

Firms Households

Market for Factors

of Production

Market for Goods

and Services

SpendingRevenue

Wages, rent, and interest

Income

Goods & Services

sold

Goods & Services bought

Labor, land, and capital

Inputs for production

Journal Assignment-Circular Journal Assignment-Circular Flow DiagramFlow Diagram

► Draw a circular flow diagram.Draw a circular flow diagram.► Identify the parts of the model that Identify the parts of the model that

correspond to the flow of goods and services correspond to the flow of goods and services and the flow of dollars for each of the and the flow of dollars for each of the following activities:following activities: Sam pays a storekeeper $1 for a quart of milk.Sam pays a storekeeper $1 for a quart of milk. Sam gets a quart of milk.Sam gets a quart of milk. Sally earns $4.50 per hour working at a fast food Sally earns $4.50 per hour working at a fast food

restaurant.restaurant. Sally works at the restaurant.Sally works at the restaurant.

The Production The Production Possibilities FrontierPossibilities Frontier

•Shows the various combinations of Shows the various combinations of two goods that can be produced by two goods that can be produced by one firm.one firm.•Assumes two goodsAssumes two goods•Assumes fixed technology and fixed Assumes fixed technology and fixed factors of production.factors of production.

The Production Possibilities The Production Possibilities FrontierFrontier

Quantity ofComputersProduced

Quantity ofCars Produced

3,000

0 1,000

2,000

700

1,000

300

A

B

2,200

600

C

D

The Production Possibilities The Production Possibilities FrontierFrontier

Quantity ofComputersProduced

Quantity ofCars Produced

3,000

1,000

2,000

2,200A

7006003000 1,000

B

C

D

Productionpossibilitiesfrontier

Concepts Illustrated by the Concepts Illustrated by the Production Possibilities FrontierProduction Possibilities Frontier

EfficiencyEfficiency TradeoffsTradeoffs Opportunity CostOpportunity Cost Economic GrowthEconomic Growth

4,000

The Production The Production Possibilities FrontierPossibilities Frontier

Quantity of ComputersProduced

Quantity ofCars Produced

3,000

2,000A

7000 1,000

E2,100

750

An outward shift in the production possibilities

frontier

Increase in technology to

produce computers.

Microeconomics and Microeconomics and MacroeconomicsMacroeconomics

MicroeconomicsMicroeconomics focuses on the focuses on the individual parts of the economy.individual parts of the economy. How households and firms make How households and firms make

decisions and how they interact in decisions and how they interact in specific marketsspecific markets

MacroeconomicsMacroeconomics looks at the economy looks at the economy as a whole.as a whole. How the markets, as a whole, interact at How the markets, as a whole, interact at

the national level.the national level.

The Essence of The Essence of Microeconomics-Buyers and Microeconomics-Buyers and

SellersSellers

The Many Facets of The Many Facets of MacroeconomicsMacroeconomics

Two Roles of EconomistsTwo Roles of Economists

When they are trying to explain When they are trying to explain the world, they arethe world, they are scientists.scientists.

When they are trying to change When they are trying to change the world, they arethe world, they are policymakers.policymakers.

Positive versus Normative Positive versus Normative AnalysisAnalysis

Positive statementsPositive statements are are statements that describe the statements that describe the world as it is.world as it is. Called Called descriptivedescriptive analysis analysis

Normative statementsNormative statements are are statements about how the world statements about how the world should be.should be. CalledCalled prescriptive prescriptive analysisanalysis

Why Economists Agree and Why Economists Agree and DisagreeDisagree

We agree on the We agree on the methodology, but not on the methodology, but not on the underlying assumptions underlying assumptions underlying incentives and underlying incentives and behavior.behavior. Example-No Child Left Behind Example-No Child Left Behind

and Test Scores.and Test Scores.

JOIN KHALID AZIZJOIN KHALID AZIZ

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