Chapter 2 - Thinking Like an Economist
Chapter 2 - Thinking Like an Economist Econ 110
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This 4 page Class Notes was uploaded by Erin Payne on Monday May 9, 2016. The Class Notes belongs to Econ 110 at Kansas State University taught by Dr. Al-Hamdi in Spring 2016. Since its upload, it has received 9 views. For similar materials see principles of Macroeconomics in Economcs at Kansas State University.
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Date Created: 05/09/16
Week 3 February 1st February 5th Spring 201 Chapter 2 Notes Thinking Like an Economist ● Economies are a science! Therefore economists = scientists. ● Economists ○ Devise theories. ○ Collect data. ○ Analyze this data. ■ Verify or refute their theories. ● They use the scientific method ⇒ social science. ● Scientific Method ○ Assumptions ○ Hypothesis ○ Collect Data (Conducting experiments is often impractical) ■ To substitute for lab experiments, economists pay close attention to natural experiments offered by history. ○ Test: Refute or Validate ○ Retest ● The Role of Assumptions ○ Assumptions ■ Can simplify the complex world. ■ The act in scientific thinking: deciding which assumption to make. ○ Different assumptions ■ To answer different questions. ■ To study shortrun or longrun effects. ● Economic Models ○ Diagrams and equations. ○ Omit many details. ○ Allow us to see what’s truly important. ○ Built with assumptions. ○ Simplify reality to improve our understanding of it. ○ “We build a simple model based off assumptions to explain or reality.” ● Two Markets: ○ Goods and services. ■ Buyers ⇒ Households ■ Sellers ⇒ Firms ○ Market for resources: Inputs/factors of production. Notes Key:Bolded texts = most important facts stressed by professor. ∴ symbol = “Therefore” or “In other words”. “ ” = Specific definition or word choice provided b instructor. Week 3 February 1st February 5th Spring 201 ■ Buyers ⇒ Firms ■ Sellers ⇒ Households ● Firms Produce goods and services. Use factors of production (inputs). ● Households Own factors of production as well as consume goods and services ● Production possibilities frontier (PPF) ○ A graph. ○ Combinations of output that the economy can possibly produce. ● A→B: Gain 100 cars; give up 200 computers. ● Opp. cost of 100 cars = 200 computers. give up ● Opp. cost of 1 car = gain= ΔΔX= Slope ofPF ● ∴ Opp. cost of goods on xaxis = slope of PPF. ● B→A: Gain 200 computers; give up 100 cars. ● Opp. cost of 200 computer = 100 cars. ● ∴ Opp. cost of goods on yaxis is reciprocal of 1 xaxis opp. cost. (Slope of PPF . ● ∴The opportunity cost is the ratio or fraction/proportion of what you give up to get something else. ● “As we produce more goods/services, it will cost more of the good/product we’re taking resources from.” ● “A bow out or concave PPF gives us a sense of increasing opportunity cost.” Notes Key Bolded texts = most important facts stressed by professor. ∴ symbol = “Therefore” or “In other words”. “ ” = Specific definition or word choice provided y instructor. Week 3 February 1st February 5th Spring 201 ● Opportunity cost give up producing one good to increase producing another good. ○ ∴Cost of producing 1 good. ● Microeconomics ○ The study of how households and firms make decisions and how they interact in markets. ● Macroeconomics ○ The study of economywide phenomena, including inflation, unemployment and economic growth. ○ ∴“Monetary economics,” “The bigger picture”. ● Positive vs. Normative Analysis ○ Positive statements ■ Attempt to describe the world as it is. ■ Descriptive. ■ Confirm or refute. More scientific statements. ● Ex. “Minimum wage causes unemployment.” ■ ∴Can be confirmed or refuted by evidence. ○ Normative statements ■ Attempt to prescribe how the world should be. ■ Prescriptive. ■ ∴ “Opinionated statements. Include the speaker's view.” ● Economists in Washington ○ Council of Economic advisors. ■ Advise the president of the U.S. ■ Annual economic report of the president. ○ Office of Management and Budget. ○ Dept. of Treasury. ○ Dept. of Labor. ○ Dept. of Justice. ○ Congressional Budget office. ○ The Federal Reserve. ● President ○ Economic advisors: what policy is best. ○ Communication advisors: how best to explain it to the public. ○ Press advisors: how the news media will report it. ○ Legislative affairs advisors: how Congress will view the proposal. ○ Political advisors: effect on the electorate. ○ Decision Notes Key:Bolded texts = most important facts stressed by professor. ∴ symbol = “Therefore” or “In other words”. “ ” = Specific definition or word choice provided b instructor. Week 3 February 1st February 5th Spring 201 ● Economists may disagree. ○ Validity of alternative positive theories about how the world works. ● Economists may have different values. ○ Different normative views about what policy should try to accomplish. ● Difference in scientific judgements ○ Different hunches about ■ Validity of alternative theories. ■ Size of important parameters. ● Measure how economic variables are related. ● Difference in values ○ Peter and Paula take the same amount of water from the well. ■ Peter’s income = $100,00. ● Tax = $10,000 (10%). ■ Paula’s income = $20,000. ● Tax = $4,000 (20%). ● Perception vs. Reality ○ Rent control ■ Adversary affects availability and quality of housing. ■ Costly way of helping the neediest members of society. ■ Many cities use rent control. ○ Trade barriers (tariffs and import quotes) ■ Economist oppose it. Notes Key:Bolded texts = most important facts stressed by professor. ∴ symbol = “Therefore” or “In other words”. “ ” = Specific definition or word choice provided by nstructor.
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