Chapter 2 Thinking Like An Economist
Chapter 2 Thinking Like An Economist Econ 202 - 01
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This 2 page Class Notes was uploaded by Roger D. on Friday April 8, 2016. The Class Notes belongs to Econ 202 - 01 at University of North Dakota taught by Kwan Yong Lee in Spring 2016. Since its upload, it has received 17 views. For similar materials see Principles Of Macroeconomics in Economcs at University of North Dakota.
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Date Created: 04/08/16
Econ 202 ~ Chapter 2 ~ Thinking Like an Economist The Economist as a Scientist Economists try to address their subject with a scientist’s objectivity. Like all scientists, they make appropriate assumptions and build simplified models to understand the world around them. Two simple economic models are the circular-flow diagram and the (ppf) production possibilities frontier. They use scientific methods which employ dispassionate development and testing of theories about how the world works. A theory (hypothesis) uses a model: Economists use models to study economic issues. Assumptions simplify the complex world and makes it easier to understand. A model ~ is a highly simplified representation of a more complicated reality. The field of economics is divided into two subfields: Microeconomics and macroeconomics. Micro- economists study decision making by households and firms and interactions between households and firms in the market place. Macroeconomists study the forces and trends that affect the economy as a whole (economy-wide phenomena). Inflation, Unemployment and Economic Growth Markets for Factors of Production: Households own factors of production and sell their use of labor, land and capital to firms Firms buy from households workers (buy labor), land and capital Markets for Goods and Services Households are buyers and consumers of goods and services from firms Firms are sellers of their products and services to households In economics, “capital” doesn’t refer to or mean money or monies. (Hard assets ~ land, buildings, equipment) PPF (production possibility frontier) ~ is a graph that shows the combination of 2 goods the economy can possibly produce given the available resources (time, labor, capital, land) and technologies available. Slope of the PPF tells you the opportunity cost of one item to its counter-part. Resources are moved when one changes position along the PPF because of trade-offs. Slope = Opportunity cost when the slope is linear. Opportunity cost ~ is what one must give up (# of Items producible) to obtain more of another producible item while moving along the PPF as the production shifts from one item or good to its counter-part. When the slope of the PPF shifts outwards (right): When additional resources are available equally for both products or services New technology which has the same effect on both goods The opportunity cost would remain the same (straight line) ~ trade-off between the two paired items remains constant If technology improved only one of the items of the PPF, the angle of the PPF would change (flatter) and its corresponding PPF would be less and the opportunity cost would be lower (less). When the slope of PPF is bow-shaped: The Law of Increasing Opportunity Costs If the opportunity cost for one good or service rises faster as more of that good or service is produced Occurs when resources (workers) of one item are moved to produce the other product or service Opportunity cost will increase as one moves along the line to the right and downward. This can be seen via a tangent line along points of the bowed PPF. There’s a “marginal” change in the increasing opportunity cost. The Economist as a Policy Advisor A positive statement is an assertion about how the world actually is and tries to explain the world. A normative statement is an assertion about how the world “should” or “ought” to be. When economists make normative statements, they are acting more as a policy advisors than as scientists, because they want to improve the world. Positive Statements ~ can be confirmed or refuted, scientific, facts, describe, descriptive, objective, “will, is” Normative Statements ~ subjective, values, claims, polices & advisories, prescribe, prescriptive, “good, bad, should, ought to, must, ought to be” Council of Economic Advisors Office of Management and Budget Department of the Treasury Department of Labor (includes the Bureau of Labor Statistics) Department of Justice Congressional Budget Office (a non-government branch) Federal Reserve (a non-government branch) Why Economists Disagree Economists who advise policymakers sometimes offer conflicting advice either because of differences in scientific judgements or because of differences in values. At other times, economists are united in the advice they offer, but policymakers may choose to ignore the advice because of the many forces and constraints imposed by the political process. They do mostly agree on: (1) ceilings on rents reduce the quantity and quality of available housing, (2) Tariffs and import quotas usually reduce general economic welfare, (3) Flexible and floating exchange rates offer an effective international monetary arrangement, (4) Tax cuts and governmental expenditures stimulate the economy and reduce unemployment, (5) Employers “should” not be restricted from outsourcing work to foreign countries, (6) economic growth leads to an increase in standards of living, and on and on.
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