Unit 2 Thinking_Like.ppt

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1、Copyright 2004 South-Western/Thomson Learning2Thinking Like an EconomistCopyright 2004 South-Western/Thomson LearningThinking Like an EconomistEvery field of study has its own terminologyMathematicsIntegrals,axioms,vector spacesPsychologyEgo,id,cognitive dissonanceLawPromissory,estoppel,torts,venues

2、EconomicsSupply,opportunity cost,elasticity,consumer surplus,demand,comparative advantage,deadweight lossCopyright 2004 South-Western/Thomson LearningThinking Like an EconomistEconomics trains you to.Think in terms of alternatives.Evaluate the cost of individual and social choices.Examine and unders

3、tand how certain events and issues are related.Copyright 2004 South-Western/Thomson LearningTHE ECONOMIST AS A SCIENTISTThe economic way of thinking.Involves thinking analytically and objectively.Makes use of the scientific method.Copyright 2004 South-Western/Thomson LearningThe Scientific Method:Ob

4、servation,Theory,and More ObservationUses 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 make the worl

5、d 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 understanding

6、of the world Two of the most basic economic models include:The Circular Flow DiagramThe Production Possibilities FrontierCopyright 2004 South-Western/Thomson LearningOur First Model:The Circular-Flow DiagramThe circular-flow diagram is a visual model of the economy that shows how dollars flow throug

7、h 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 sellgoods and servic

8、esHire 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 Circular-Flow

9、DiagramFirms Produce and sell goods and services Hire and use factors of productionHouseholds Buy and consume goods and services Own and sell factors of productionCopyright 2004 South-Western/Thomson LearningOur First Model:The Circular-Flow DiagramMarkets for Goods and Services Firms sell Household

10、s buyMarkets for Factors of Production Households sell Firms buyCopyright 2004 South-Western/Thomson LearningOur First Model:The Circular-Flow DiagramFactors of Production Inputs used to produce goods and services Land,labor,and capitalCopyright 2004 South-Western/Thomson LearningOur Second Model:Th

11、e Production Possibilities FrontierThe 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 FrontierCopyright200

12、3 Southwestern/Thomson LearningProductionpossibilitiesfrontierABCQuantity ofCars Produced2,2006001,00030007002,0003,0001,000Quantity ofComputersProducedDCopyright 2004 South-Western/Thomson LearningOur Second Model:The Production Possibilities FrontierConcepts Illustrated by the Production Possibili

13、ties Frontier EfficiencyTradeoffsOpportunity CostEconomic GrowthFigure 3 A Shift in the Production Possibilities FrontierCopyright 2004 South-WesternEQuantity ofCars Produced2,0007002,10075004,0003,0001,000Quantity ofComputersProducedACopyright 2004 South-Western/Thomson LearningMicroeconomics and M

14、acroeconomicsMicroeconomics focuses on the individual parts of the economy.How households and firms make decisions and how they interact in specific marketsMacroeconomics looks at the economy as a whole.Economy-wide phenomena,including inflation,unemployment,and economic growthCopyright 2004 South-W

15、estern/Thomson LearningPOSITIVE VERSUS NORMATIVE ANALYSISPositive statements are statements that attempt to describe the world as it is.Called descriptive analysisNormative statements are statements about how the world should be.Called prescriptive analysisCopyright 2004 South-Western/Thomson Learni

16、ngPositive or Normative Statements?An increase in the minimum wage will cause a decrease in employment among the least-skilled.POSITIVEHigher federal budget deficits will cause interest rates to increase.POSITIVE?POSITIVE VERSUS NORMATIVE ANALYSIS?Copyright 2004 South-Western/Thomson LearningPositiv

17、e or Normative Statements?The income gains from a higher minimum wage are worth more than any slight reductions in employment.NORMATIVEState governments should be allowed to collect from tobacco companies the costs of treating smoking-related illnesses among the poor.NORMATIVE?POSITIVE VERSUS NORMAT

18、IVE ANALYSIS?Copyright 2004 South-Western/Thomson LearningPositive 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 lower prices for consumers.If the g

19、overnment raises the tax on beer,this will lead to a fall in profits of the brewers.Copyright 2004 South-Western/Thomson LearningNormative statements:The level of duty on petrol is too unfair and unfairly penalizes motorists.The London congestion charge for drivers of petrol-guzzling cars should inc

20、rease 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 LearningWHY ECONOMISTS DISAGREEThey may di

21、sagree 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 LearningSummaryEconomists try to address their subjects with a s

22、cientists 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 LearningSummaryEconomics is divided

23、 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 LearningSummaryA positive statement is an assertion about how the world is.A normativ

24、e 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 LearningSummaryEconomists 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.