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1、2,Thinking Like an Economist,Thinking Like an Economist,Every field of study has its own terminologyMathematicsintegrals axioms vector spacesPsychologyego id cognitive dissonanceLawpromissory estoppel torts venuesEconomicssupply opportunity cost elasticity consumer surplus demand comparative advanta
2、ge deadweight loss,Thinking Like an Economist,Economics trains you to. . . . Think in terms of alternatives.Evaluate the cost of individual and social choices.Examine and understand how certain events and issues are related.,THE ECONOMIST AS A SCIENTIST,The economic way of thinking . . .Involves thi
3、nking analytically and objectively.Makes use of the scientific method.,The Scientific Method: Observation, Theory, and More Observation,Uses abstract models to help explain how a complex, real world operates.Develops theories, collects, and analyzes data to evaluate the theories.,The Role of Assumpt
4、ions,Economists make assumptions in order to make the world easier to understand. The art in scientific thinking is deciding which assumptions to make. Economists use different assumptions to answer different questions.,Economic Models,Economists use models to simplify reality in order to improve ou
5、r understanding of the world Two of the most basic economic models include:The Circular Flow DiagramThe Production Possibilities Frontier,Our First Model: The Circular-Flow Diagram,The circular-flow diagram is a visual model of the economy that shows how dollars flow through markets among households
6、 and firms.,Figure 1 The Circular Flow,Copyright 2004 South-Western,Spending,Revenue,Income,= Flow of inputs,and outputs,= Flow of dollars,Our First Model: The Circular-Flow Diagram,Firms Produce and sell goods and services Hire and use factors of productionHouseholds Buy and consume goods and servi
7、ces Own and sell factors of production,Our First Model: The Circular-Flow Diagram,Markets for Goods and Services Firms sell Households buyMarkets for Factors of Production Households sell Firms buy,Our First Model: The Circular-Flow Diagram,Factors of Production Inputs used to produce goods and serv
8、ices Land, labor, and capital,Our Second Model: The Production Possibilities Frontier,The 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
9、 2 The Production Possibilities Frontier,Copyright2003 Southwestern/Thomson Learning,Quantity of,Cars Produced,0,3,000,1,000,Quantity of,Computers,Produced,Our Second Model: The Production Possibilities Frontier,Concepts Illustrated by the Production Possibilities Frontier EfficiencyTradeoffsOpportu
10、nity CostEconomic Growth,Figure 3 A Shift in the Production Possibilities Frontier,Copyright 2004 South-Western,Quantity of,Cars Produced,0,Quantity of,Computers,Produced,Microeconomics and Macroeconomics,Microeconomics focuses on the individual parts of the economy.How households and firms make dec
11、isions and how they interact in specific marketsMacroeconomics looks at the economy as a whole.Economy-wide phenomena, including inflation, unemployment, and economic growth,THE ECONOMIST AS POLICY ADVISOR,When economists are trying to explain the world, they are scientists.When economists are tryin
12、g to change the world, they are policy advisor.,POSITIVE VERSUS NORMATIVE ANALYSIS,Positive 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 analysis,Positive or Norm
13、ative 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,?,Positive or Normative Statements? The income gains from a highe
14、r 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 NORMATIVE ANALYSIS,?,Economists in Washington,. . . serve
15、 as advisers in the policymaking process of the three branches of government:LegislativeExecutiveJudicial,Economists in Washington,Some government agencies that collect economic data and make economic policy:Department of Commercehttp:/merce.govBureau of Labor Statisticshttp:/www.bls.govCongressiona
16、l Budget Officehttp:/www.cbo.govFederal Reserve Boardhttp:/www.federalreserve.gov,WHY ECONOMISTS DISAGREE,They may disagree 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.,
