Download Thinking Like an Economist

Thinking Like an Economist
 Economics trains us to think in terms of
alternatives, cost of choices, and provides
insights on how certain issues are related
 Economists think both like scientists and policy
makers.
 The Economist as a scientist uses the scientific
method (observation, theory, and more
observation)
 Similar to science interplay between theory and
observation occurs in economics
 Any problems with this approach ???
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Thinking Like an Economist
 Economic scientists observe and study the effects
of an occurrence; economic policy makers design
a policy response to an occurrence
 Economic policy makers/ policy advisors
recommend policies to improve economic
outcomes
 Policy decisions are tough because of the trade-off
between equity and efficiency.
 Canadian Organizations that employ economists
to give policy advice-???
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Thinking Like an Economist
 Two important techniques used:
 Assumptions
 Short-run and long-run assumptions
 Economic models
 The circular-flow diagram
 The production possibilities frontier
(PPF)
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Model #1: The Circular-Flow Diagram
 The model offers a simple way of organizing all the
economic transactions that occur between all
households and firms in the economy.
 Economy has two types of decision-makers:
 Households – consumers of goods and services
 Firms – producers of goods and services
 Households and firms interact in two types of
markets:
 Markets for goods & services
 Markets for factors of production
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Revenue
Markets for
goods & services
Goods &
services sold
Flow of
goods &
Services
Spending
Goods &
services
bought
Firms
Households
Flow of $
Inputs for production
L, Land, K
Markets for Factors of
Production
W, R, and Profit
Income
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Model #2: PPF
 PPF shows the combinations of output that the
economy can possibly produce given the available
factors of production and given the available
technology that can turn these factors into output.
 PPF demonstrates the following economic
principles




Scarcity
Efficiency
Trade-offs
Opportunity cost
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Production Possibility Frontier
With given resources and technology
Unattainable
Quantity
of
TVs
PPF
Attainable
Quantity of Stereos
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Shifts in PPF
 Technological advances in a particular industry can
shift the PPF thus increasing the quantity of goods
produced with the existing resources.
TVs
produced
Stereos
produced
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Microeconomics and
Macroeconomics
 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
 Micro economics and macroeconomics are
closely intertwined but the two fields are
distinct
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Positive and Normative
Statements
 Positive statements are descriptive in
nature and are capable of being verified.
They attempt to describe the world as it is.
 Q: How does the economy work?
 Normative statements are statements of
what ought to be done. They attempt to
prescribe how the world should be. It
involves one’s values and ethics.
 Q: How can we improve the working of the
economy?
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Why economists disagree?
 Most disagreements between economists result from
inconclusive empirical evidence or differences in
individual values.
 Disagree on the validity of positive theories about
how the economy works (responsiveness of savings
to taxes)
 Each has different normative values giving rise to
conflicting policy prescriptions (progressive taxation)
 Political constraints (agricultural subsidies, rent
control)
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