Harcourt Brace & Company Chapter 2 Thinking Like an Economist.

Harcourt Brace & Company

Chapter 2

Thinking Like an Economist


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.


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.


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


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


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.


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).


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.


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


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.


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.


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)


Principles of Economics Illustrated by the Production Possibilities Frontier . . .

• Efficiency• Tradeoffs• Opportunity Cost• Economic Growth


Production Possibilities FrontierC

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Computers



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A

EfficientResource Use

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Tradeoffs

Computers

300


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”



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3000Computers



ars

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Growth

Computers

Harcourt Brace & Company Chapter 2 Thinking Like an Economist.

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