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Chapter 2 - Thinking Like an Economist

by: Erin Payne

Chapter 2 - Thinking Like an Economist Econ 110

Marketplace > Kansas State University > Economcs > Econ 110 > Chapter 2 Thinking Like an Economist
Erin Payne

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About this Document

These notes cover the lectures of Dr. Mohaned Al-Hamdi for the week 2/1/16 - 2/5/16 (Week 3).
principles of Macroeconomics
Dr. Al-Hamdi
Class Notes
Macroeconomics, Econ, 110, Chapter, 2, thinking, Like, an, economist
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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 of​PF  ● ∴​ 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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