1、,Thinking Like an Economist,Chapter 2,Copyright 2001 by Harcourt, Inc.All rights reserved. Requests for permission to make copies of any part of thework should be mailed to:Permissions Department, Harcourt College Publishers,6277 Sea Harbor Drive, Orlando, Florida 32887-6777.,Every field of study ha
2、s its own terminology,Mathematics,Psychology,Law,Every field of study has its own terminology,Economics,Supply,Demand,Elasticity,Consumer Surplus,Comparative advantage,Opportunity cost,Deadweight loss,Economics trains you to. . . .,Think in terms of alternatives.Evaluate the cost of individual and s
3、ocial choices.Examine and understand how certain events and issues are related.,The Economist as a Scientist,The economic way of thinking . . .Involves thinking analytically and objectively.Makes use of the scientific method.,The Scientific Method,Uses abstract models to help explain how a complex,
4、real world operates.Develops theories, collects, and analyzes data to prove the theories.,Observation, Theory and More Observation!,The Role of Assumptions,Economists make assumptions in order to make the world easier to understand. The art in scientific thinking is deciding which assumptions to mak
5、e. Economists use different assumptions to answer different questions.,The Economic Way of Thinking,Includes developing abstract models from theories and the analysis of the models.Uses two approaches:,Descriptive (reporting facts, etc.)Analytical (abstract reasoning),Economic Models,Economists use
6、models to simplify reality in order to improve our understanding of the world Two of the most basic economic models include:,The Circular Flow Model,The Production Possibilities Frontier,The Circular-Flow Model,The circular-flow model is a simple way to visually show the economic transactions that o
7、ccur between households and firms in the economy.,The Circular-Flow Diagram,Firms,Households,Market for Factors of Production,Market for Goods and Services,The Circular-Flow Diagram,Households Buy and consume goods and services Own and sell factors of production,Firms Produce and sell goods and serv
8、ices Hire and use factors of production,The Circular-Flow Diagram,Markets for Factors of Production Households sell Firms buy,Markets for Goods & Services Firms sell Households buy,The Circular-Flow Diagram,Factors of Production Inputs used to produce goods and services Land, labor, and capital,The
9、Production Possibilities Frontier,The production possibilities frontier is a graph showing the various combinations of output that the economy can possibly produce given the available factors of production and technology.,The Production Possibilities Frontier,Quantity ofComputersProduced,Quantity of
10、Cars Produced,3,000,1,000,The Production Possibilities Frontier,Quantity ofComputersProduced,Quantity ofCars Produced,3,000,1,000,2,000,2,200,A,700,600,300,0,1,000,B,C,D,Production,possibilities,frontier,Concepts Illustrated by the Production Possibilities Frontier,EfficiencyTradeoffsOpportunity Cos
11、tEconomic Growth,The Production Possibilities Frontier,Quantity of ComputersProduced,Quantity ofCars Produced,3,000,2,000,A,700,0,1,000,An outward shift in the production possibilities frontier,Microeconomics and Macroeconomics,Microeconomics focuses on the individual parts of the economy.How househ
12、olds and firms make decisions and how they interact in specific marketsMacroeconomics looks at the economy as a whole.How the markets, as a whole, interact at the national level.,Two Roles of Economists,When they are trying to explain the world, they are scientists.When they are trying to change the
13、 world, they are policymakers.,Positive versus Normative Analysis,Positive statements are statements that describe the world as it is.Called descriptive analysisNormative statements are statements about how the world should be.Called prescriptive analysis,?,?,Positive or Normative Statements?,An inc
14、rease in the minimum wage will cause a decrease in employment among the least-skilled.,?,?,?,Positive or Normative Statements?,Higher federal budget deficits will cause interest rates to increase.,?,?,?,?,Positive or Normative Statements?,The income gains from a higher minimum wage are worth more th
15、an any slight reductions in employment.,?,?,?,Positive or Normative Statements?,State governments should be allowed to collect from tobacco companies the costs of treating smoking-related illnesses among the poor.,Economists in Washington . . .,. . . serve as advisers in the policymaking process of
16、the three branches of government:LegislativeExecutiveJudicial,Why Economists Disagree,They may disagree on theories about how the world works.They may hold different values and, thus, different normative views.,Examples of What Most Economists Agree On,A ceiling on rents reduces the quantity and qua
17、lity of housing available.Tariffs and import quotas usually reduce general economic welfare.,Summary,In order to address subjects with objectivity, economics makes use of the scientific method. The field of economics is divided into two subfields: microeconomics and macroeconomics.,Summary,Economics
18、 relies on both positive and normative analysis. Positive statements assert how the world “is” while normative statements assert how the world “should be.”Economists may offer conflicting advice due to differences in scientific judgments or to differences in values.,The Circular-Flow Diagram,The Production Possibilities Frontier,The Production Possibilities Frontier,The Production Possibilities Frontier,
