PowerPoint Presentations for Principles of...

PowerPoint Presentations for Principles of Microeconomics Seventh Canadian Edition by Mankiw/Kneebone/McKenzie

Adapted for the Seventh Canadian Edition by

Marc Prud’homme University of Ottawa

THINKING LIKE AN ECONOMIST

Chapter 2

Copyright © 2017 by Nelson Education Ltd. 2-2

THINKING LIKE AN ECONOMIST

Before delving into the substance and details of economics, it is helpful to have an overview of how economists approach the world.

This chapter, therefore, discusses the field’s methodology. What is distinctive about how economists confront a

question? What does it mean to think like an economist?


THE ECONOMIST AS SCIENTIST

Economists try to address their subject with a scientist’s objectivity.


The scientific method involves observation, theory, and more observation.

Economists use theory and observation like other scientists, but they do face an obstacle that makes their task especially challenging: Experiments are often difficult in

economics. Copyright © 2017 by Nelson Education Ltd.

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THE ECONOMIST AS SCIENTIST THE SCIENTIFIC METHOD

Assumptions can simplify the complex world and make it easier to understand.

The art in scientific thinking is deciding which assumptions to make.


THE ECONOMIST AS SCIENTIST THE ROLE OF ASSUMPTIONS

Economists also use models to learn about the world that are most often composed of diagrams and equations.

Economic models omit many details to allow us to see what is truly important.

All the models are built with assumptions.


THE ECONOMIST AS SCIENTIST ECONOMIC MODELS

Circular-Flow Diagram: A visual model of the economy that shows how dollars flow through markets among households and firms.


THE ECONOMIST AS SCIENTIST OUR FIRST MODEL:

THE CIRCULAR-FLOW DIAGRAM

FIGURE 2.1 The Circular Flow


Production possibilities frontier: 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.


THE ECONOMIST AS SCIENTIST OUR SECOND MODEL:

THE PRODUCTION POSSIBILITIES FRONTIER

FIGURE 2.2 The Production Possibilities Frontier


Copyright © 2017 by Nelson Education Ltd.

Point on

graph

Production

Com-puters Wheat

A 500 0

B 400 1000

C 250 2500

D 100 4000

E 0 5000

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Active Learning Production Possibilities Frontier Example

A B

C D

E


A. On the graph, find the point that represents (100 computers, 3000 tons of wheat); label it F. Would it be possible for the economy to produce this combination of the two goods? Why or why not?

B. Next, find the point that represents (300 computers, 3500 tons of wheat); label it G. Would it be possible for the economy to produce this combination of the two goods?

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Active Learning Discussion Questions


Point F: 100 computers, 3000 tons of wheat Point F requires 40 000

hours of labour. Possible but not efficient; could get more of either good without sacrificing any of the other.

0

1,000

2,000

3,000

4,000

5,000

6,000

0 100 200 300 400 500 600Computers

Wheat (tons)

F

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Active Learning Answers


0

1,000

2,000

3,000

4,000

5,000

6,000

0 100 200 300 400 500 600Computers

Wheat (tons)

G

Point G: 300 computers, 3500 tons of wheat Point G requires 65 000

hours of labour. Not possible because economy has only 50 000 hours.

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FIGURE 2.3 A Shift in the Production Possibilities Frontier


Microeconomics: The study of how households and firms make decisions and how they interact in markets.

Macroeconomics: The study of economy-wide phenomena, including inflation, unemployment, and economic growth.


THE ECONOMIST AS SCIENTIST MICROECONOMICS AND MACROECONOMICS

2-18 Copyright © 2017 by Nelson Education Ltd.

In what sense is economics like a science?

Draw a production possibilities frontier for a society that produces food and clothing. Show an efficient point, an inefficient point, and an infeasible point. Show the effects of a drought.

Define microeconomics and macroeconomics.

Quick Quiz

THE ECONOMIST AS POLICY ADVISER

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

When they are trying to help improve it, they are policy advisers.


Positive statements: Claims that attempt to describe the world as it is.

Normative statements: Claims that attempt to prescribe how the world should be.


THE ECONOMIST AS POLICY ADVISER POSITIVE VERSUS NORMATIVE ANALYSIS


Which of these statements are “positive” and which are “normative”? How can you tell the difference?

a. Prices rise when the government increases the quantity of money.

b. The government should print less money.

c. A tax cut is needed to stimulate the economy.

d. An increase in the price of burritos will cause an increase in consumer demand for video rentals.

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Active Learning Discussion Questions


a. Prices rise when the government increases the quantity of money.

Positive: describes a relationship, could use data to confirm or refute

b. The government should print less money.

Normative: this is a value judgment, cannot be confirmed or refuted

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c. A tax cut is needed to stimulate the economy.

Normative: another value judgment

d. An increase in the price of burritos will cause an increase in consumer demand for video rentals.

Positive: describes a relationship

Note: A statement need not be true to be positive.

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Economists at Finance Canada help design tax policy.

Economists at Industry Canada help design and enforce Canada’s competition laws.

Economists at Global Affairs Canada help negotiate trade agreements with other countries.


THE ECONOMIST AS POLICY ADVISER ECONOMISTS IN OTTAWA

Economists at Employment and Social Development Canada analyze data on workers and on those looking for work to help formulate labour-market policies.

Economists at Environment Canada help design environmental regulations. Statistics Canada employs economists to collect the data analyzed by other economists and then give policy advice.


THE ECONOMIST AS POLICY ADVISER ECONOMISTS IN OTTAWA (CONTINUED)

TABLE 2.1 Websites of Some Major Economic Organizations


ECONOMISTS IN OTTAWA (CONTINUED)

Any economist who advises government knows that his or her recommendations are not always heeded.

In the real world, figuring out the right policy is only part of the job for the government.


THE ECONOMIST AS POLICY ADVISER WHY ECONOMISTS’ ADVICE IS NOT ALWAYS

FOLLOWED


Give an example of a positive statement and an example of a normative statement.

Name three parts of government that regularly rely on advice from economists.

Quick Quiz

WHY ECONOMISTS DISAGREE

There are two basic reasons: They can disagree about

the validity of alternative positive theories about how the world works. They can have different

values and, therefore, different normative views about what a policy should try to accomplish.


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Economists often disagree about the direction in which truth lies.

For example, economists disagree about whether the government should levy taxes based on a household’s income or its consumption.


WHY ECONOMISTS DISAGREE DIFFERENCES IN SCIENTIFIC JUDGMENTS

Suppose that Peter and Paula both take the same amount of water from the town well. To pay for maintaining the well, the town taxes its residents. Peter has income of $50 000 and is taxed $5000, or 10% of his income. Paula has income of $10 000 and is taxed $2000, or 20% of her income.

Is this policy fair?

If not, who pays too much and who pays too little?


WHY ECONOMISTS DISAGREE DIFFERENCES IN VALUES

Because of differences in scientific judgments and differences in values, some disagreement among economists is inevitable.

But they do often share a common view.


WHY ECONOMISTS DISAGREE PERCEPTION VERSUS REALITY

TABLE 2.2 Propositions about Which Most Economists Agree


TABLE 2.2 Propositions about Which Most Economists Agree (Continued)



Why might economic advisers to the Prime Minister disagree about a question of policy?

Quick Quiz


Screwdrivers and Bloody Marys 1. Draw a graph with Bloody Marys on the horizontal axis and

Screwdrivers on the vertical axis. A Bloody Mary contains tomato juice and one shot of vodka. A Screwdriver contains orange juice and one shot of vodka. Assume that we have plenty of orange juice and tomato juice, but only one small bottle of vodka containing six shots.

2. How many Bloody Marys can we make if we only make Bloody Marys?

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Classroom Activity


Screwdrivers and Bloody Marys (Continued) 3. How many Screwdrivers can we make if we only make

Screwdrivers? 4. Could we make six of both drinks? Why not? 5. On your graph, show all of the possible combinations of Bloody

Marys and Screwdrivers that can be made, given a small bottle of vodka.

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Classroom Activity

THE END

Chapter 2



Graphs serve two purposes: When developing economic theories, graphs offer a

way to visually express ideas that might be less clear if described with equations or words. When analyzing economic data, graphs provide a

way of finding how variables are in fact related in the world.

Appendix GRAPHING: A BRIEF REVIEW



Three common types of graphs: Pie chart in panel Bar graph in panel Time-series graph

GRAPHS OF A SINGLE VARIABLE

FIGURE 2A.1 Types of Graphs



Economists are often concerned with the relationships between variables.

The coordinate system makes possible the display of two variables on a single graph.

The coordinate system makes the correlation between the two variables easy to see.

GRAPHS OF TWO VARIABLES


FIGURE 2A.2 Using the Coordinate System



Economists also often look at how one variable affects another, holding everything else constant.

To see how this is done, let’s consider one of the most important graphs in economics—the demand curve.


CURVES IN THE COORDINATE SYSTEM

TABLE 2A.1 Novels Purchased by Emma



Suppose that Emma’s income is $30 000 per year. If the number of novels Emma purchases is placed on

the x-axis and the price of novels on the y-axis, we can graphically represent the middle column of Table 2A.1. Figure 2A.3 is known as Emma’s demand curve for

novels.


FIGURE 2A.3 Demand Curve



In economics, it is important to distinguish between movements along a curve and shifts of a curve.

When a variable that is not named on either axis changes, the curve shifts.


FIGURE 2A.4 Shifting Demand Curves



The slope of a line is the ratio of the vertical distance covered to the horizontal distance covered as we move along the line.

Mathematically:


SLOPE

FIGURE 2A.5 Calculating the Slope of a Line



What is the slope of Emma’s demand curve for novels?

SLOPE (CONTINUED)



The general functional form for a linear demand curve is:

Where a and b are called the parameters of the function, and represent positive numbers.

GRAPHING FUNCTIONS



For Emma’s demand curve depicted in Figure 2A.3, which assumes that her income is $30 000, the values for a and b are 45 and 4, respectively, and the precise functional form of her demand curve is:

At P = 10, QD = 45 – 4(10) = 45 – 40 = 5

GRAPHING FUNCTIONS (CONTINUED)


FIGURE 2A.6 Emma’s Demand Curve With Income of $30 000


FIGURE 2A.7 Emma’s Demand Curve with Different Incomes



When graphing data from the real world, it is often more difficult to establish how one variable affects another. Omitted-variable trap Reverse causality trap

CAUSE AND EFFECT



Omitted Variables Omitting a variable can lead to a deceptive graph. Principle: “When you see a graph being used to

support an argument about cause and effect, it is important to ask whether the movements of an omitted variable could explain the results you see.”

CAUSE AND EFFECT (CONTINUED)


FIGURE 2A.8 Graph with an Omitted Variable



Reverse Causality Economists can also make mistakes about causality by

misreading its direction. Observation: More dangerous cities have more police

officers. Does having more police cause more crime? OR Does having more crime cause more police hiring?

Nothing in the graph itself allows us to establish the direction of causality.

CAUSE AND EFFECT (CONTINUED)


FIGURE 2A.9 Graph Suggesting Reverse Causality


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