Chapter 2 - 3/30/16 - Thinking Like an Economist
Chapter 2 - 3/30/16 - Thinking Like an Economist ECON 222 001
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This 2 page Class Notes was uploaded by Julia List on Monday May 2, 2016. The Class Notes belongs to ECON 222 001 at California Polytechnic State University San Luis Obispo taught by Fisher in Spring 2016. Since its upload, it has received 7 views.
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Date Created: 05/02/16
Thinking Like an Economist (Chapter 2) – Lecture Notes 3/30/16 The Economist as a Scientist o Economists play two roles: Scientists- try to explain the world Policy advisors- try to improve it o Scientific method- dispassionate development and testing of theories about how the world works Ethical philosophy Example of coal powered power plants in ohio o Mother earth vs. poor people who need energy (bad housing, less insulation) Normative statement (go by the norms) – value statement Assumptions and Models o Assumptions simplify the complex world o Example: to study international trade, assume two countries and two goods Unrealistic but easy to learn and give insight o Model – simplified representation of a complicated reality- the deep logic Ex: Road map, model of human anatomy, model airplane o Circular Flow Diagram- visual model of the economy shows how dollars flow through markets Firms Households -Buy/Hire factor of production, use them to produce -own the factors of production (labor, goods and services infrastructure, firms), sell/rentthem to firms -sellgoods and services for income -buy goods and services Every dollar goes around roughly 6 times Firms and households are interdependent *Money on outside o Nominal- in name, money paid through a checking account Exports/Imports and Government left out Macroeconomic Facts o USA produces 18 Million per year in goods for final demand o 2/3 of income accrues to workers o 1/3 of income accrues to owners of capital o 1/5 of world in economic power Second Model- Production Possibilities Frontier (PPF) o Two goods: computers and wheat o One resourse: labor o Economy has 50,000 labor hours per month available for production Each computer takes 100 hours to make Each ton of wheat takes 10 hours to make Price of a computer is ten times the price of a ton of wheat o PPF Example: Wheat and Computers Production 6000 computers wheat 500 0 4000 400 1000 2000 250 2500 0 100 4000 0 100 200 300 400 500 600 0 5000 o Inside region possible (not efficient), outside region not possible o Slope=price wheat/computer=10 Human creativity makes us better at making computers or wheat, brings line further from origin! Higher slope=steeper line= higher opportunity cost = more expensive o Opportunity cost of an item is what must be given up to make that item o Economic growth- human creativity- PPF outward o If PPF is a parabola (bowed out)- easier to do something in the middle than an extreme- as you specialize in making one resource, it gets harder to make the other Microecon vs Macroecon o Microeconomics- individual, firm. Study of how households and firms make decisions and how they interact in markets o Macroeconomics- the study of economy wide phenomena including inflation, unemployment, and economic growth. Positive vs normative o Positive statements- economists make scientific statement s to describe the world as it is o Normative statements- economics act as policy advisors to prescribe how the world should be Statement of value
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