principles of microeconomics & principles of macroeconomics: ch. 2 second canadian edition...
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Principles of Microeconomics & Principles of Macroeconomics: Ch. 2 Second Canadian Edition
Chapter 2
Thinking Like an Economist
© 2002 by Nelson, a division of Thomson Canada Limited
Principles of Microeconomics & Principles of Macroeconomics: Ch. 2 Second Canadian Edition
Overview
The Economist as a ScientistThe Economist as a Policy-MakerWhere Economists Disagree and
where Economists Agree
Principles of Microeconomics & Principles of Macroeconomics: Ch. 2 Second Canadian Edition
Economics trains us to think . . .
… in terms of alternatives.
… and understand the cost of
individual and social choices.
… and provide us with insights into
how certain events and issues are
related.
Principles of Microeconomics & Principles of Macroeconomics: Ch. 2 Second Canadian Edition
Thinking Like an Economist
The economic way of thinking requires
one to think analytically and
objectively.
The economic way of thinking is like
the Scientific Method.
Principles of Microeconomics & Principles of Macroeconomics: Ch. 2 Second Canadian Edition
The Economic Way of Thinking
The Scientific Method uses abstract models to help understand how a complex real-world operates.
The Scientific Method develops theory, collects and analyzes data to prove the theory.
Principles of Microeconomics & Principles of Macroeconomics: Ch. 2 Second Canadian Edition
The Economic Way of Thinking includes. . .
… the development of abstract models from theories and the analysis of the models using two approaches:
–descriptive: reporting facts, etc.
–analytical: abstract reasoning
Principles of Microeconomics & Principles of Macroeconomics: Ch. 2 Second Canadian Edition
The Circular-Flow Model
Provides a simple way of describing all the economic transactions that occur in a Market Economy.
Emphasizes decentralization in that economic decisions are made by Households and Businesses in Product and Resource Markets.
Principles of Microeconomics & Principles of Macroeconomics: Ch. 2 Second Canadian Edition
Diagram: The Circular-Flow Model
Households Businesses
Resource Markets
Product Markets
Principles of Microeconomics & Principles of Macroeconomics: Ch. 2 Second Canadian Edition
Diagram: The Circular-Flow Model
Households Businesses
Product Markets
Flow ofResources
SupplyResources
DemandResources
Resource Markets
Principles of Microeconomics & Principles of Macroeconomics: Ch. 2 Second Canadian Edition
Diagram: The Circular-Flow Model
Households Businesses
Product Markets
Flow of
SupplyResources
DemandResources
LandLabourCapital
Resource Markets
Principles of Microeconomics & Principles of Macroeconomics: Ch. 2 Second Canadian Edition
Diagram: The Circular-Flow Model
Households Businesses
Product Markets
Flow of Goodsand Services
SupplyGoods &Services
DemandGoods &Services
Resource Markets
Principles of Microeconomics & Principles of Macroeconomics: Ch. 2 Second Canadian Edition
Diagram: The Circular-Flow Model
Households Businesses
Product Markets
The Flow of Dollars
$ Spending$ Revenue
Resource Markets
Principles of Microeconomics & Principles of Macroeconomics: Ch. 2 Second Canadian Edition
Diagram: The Circular-Flow Model
Households Businesses
Product Markets
The Flow of Dollars
$ Revenue
$ Expenses$ Income
$ Spending
Resource Markets
Principles of Microeconomics & Principles of Macroeconomics: Ch. 2 Second Canadian Edition
Diagram: The Circular-Flow Model
Households Businesses
Product Markets
The Flow of Dollars
$ Revenue
$ Expenses$ Income
RentWagesProfit
$ Spending
Resource Markets
Principles of Microeconomics & Principles of Macroeconomics: Ch. 2 Second Canadian Edition
Diagram: The Circular-Flow Model
Households Businesses
Product Markets
$$
$$
Dollar FlowReal Flow
Resource Markets
Principles of Microeconomics & Principles of Macroeconomics: Ch. 2 Second Canadian Edition
Microeconomics and Macroeconomics
Microeconomics focuses on “the individual parts of the economy.”– e.g. individual markets
– e.g. price increase in the house marketMacroeconomics looks at the
“economy as a whole.”– e.g. aggregate of markets
– e.g. average price increase for all goods
Principles of Microeconomics & Principles of Macroeconomics: Ch. 2 Second Canadian Edition
A Second Economic Model: Production Possibilities Frontier….
… is a graph that shows the various combinations of output that the economy can possibly produce given the available factors of production and technology.
Principles of Microeconomics & Principles of Macroeconomics: Ch. 2 Second Canadian Edition
Production Possibilities FrontierC
om
pu
ters
Cars0
Principles of Microeconomics & Principles of Macroeconomics: Ch. 2 Second Canadian Edition
Production Possibilities FrontierC
om
pu
ters
700
A
Cars0
2000
Principles of Microeconomics & Principles of Macroeconomics: Ch. 2 Second Canadian Edition
Production Possibilities FrontierC
om
pu
ters
3000
700
A
Cars
E
0
2000
Principles of Microeconomics & Principles of Macroeconomics: Ch. 2 Second Canadian Edition
Production Possibilities FrontierC
om
pu
ters
3000
1000700
A
Cars
E
F
0
2000
Principles of Microeconomics & Principles of Macroeconomics: Ch. 2 Second Canadian Edition
Production Possibilities FrontierC
om
pu
ters
3000
1000700
A
Cars
E
F
0
2000
Principles of Microeconomics & Principles of Macroeconomics: Ch. 2 Second Canadian Edition
Principles of Economics Illustrated by the Production Possibilities Frontier . . .
EfficiencyTradeoffsOpportunity CostEconomic Growth
Principles of Microeconomics & Principles of Macroeconomics: Ch. 2 Second Canadian Edition
Efficient Resource Use
Production Possibilities FrontierC
om
pu
ters
3000
1000
2000
700
A
Cars
E
F
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B?1000
300
Principles of Microeconomics & Principles of Macroeconomics: Ch. 2 Second Canadian Edition
Production Possibilities FrontierC
om
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ters
3000
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A
Cars
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0
1000
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C
Tradeoffs
Principles of Microeconomics & Principles of Macroeconomics: Ch. 2 Second Canadian Edition
Production Possibilities FrontierC
om
pu
ters
3000
1000
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700
A
Cars
E
F
0
1000
900
C
Opportunity Cost of next 200 cars is 1000 computers. Opportunity cost of 1 car is 5 computers
OpportunityCost
Principles of Microeconomics & Principles of Macroeconomics: Ch. 2 Second Canadian Edition
Economic Growth
Production Possibilities FrontierC
om
pu
ters
3000
1000
2000
700Cars
0
1000
300
Principles of Microeconomics & Principles of Macroeconomics: Ch. 2 Second Canadian Edition
Quick Quiz! Check It Out!
In what sense is economics like science?
Define: Microeconomics Macroeconomics
Principles of Microeconomics & Principles of Macroeconomics: Ch. 2 Second Canadian Edition
Overview
The Economist as a ScientistThe Economist as a Policy-MakerWhere Economists Disagree and
where Economists Agree
Principles of Microeconomics & Principles of Macroeconomics: Ch. 2 Second Canadian Edition
Two Roles of Economists . . .
When they are trying to explain the world,
they are
Scientists.When they are trying
to change the world they are
Policy-makers.
Principles of Microeconomics & Principles of Macroeconomics: Ch. 2 Second Canadian Edition
Positive versus Normative Analysis
Positive: Statements or assertions dealing with matters of fact or questions about how things are (descriptive analysis).
Normative: Statements that reflect individual opinions (prescriptive analysis).
Principles of Microeconomics & Principles of Macroeconomics: Ch. 2 Second Canadian Edition
Positive or Normative Statements? An increase in the minimum wage will cause a
decrease in employment among the least skilled. Higher federal budget deficits will cause interest
rates to increase. The income gains from a higher minimum wage
are worth more than any slight reduction in employment.
Provincial governments should be allowed to collect from tobacco companies the costs of treating smoking-related illnesses among the poor.
Principles of Microeconomics & Principles of Macroeconomics: Ch. 2 Second Canadian Edition
Economists in Government . . . Department of Finance — formulate tax policy. Industry Canada — design competition policy. Foreign Affairs — assist with trade agreements. Human Resources Development Canada —
formulate labour market policies. Bank of Canada — implement monetary policy. Environment Canada — design environment
laws.
Principles of Microeconomics & Principles of Macroeconomics: Ch. 2 Second Canadian Edition
Economists in the Private Sector . . . C.D. Howe Institute — suggest policy options. Fraser Institute — suggest policy options. Provide forecasts for companies. Assist firms manage resources efficiently. Assist with investment decisions.
Principles of Microeconomics & Principles of Macroeconomics: Ch. 2 Second Canadian Edition
Quick Quiz! Check It Out!
Give an example of a positive statement.
Name three areas of government policy which economists provide advice for.
Identify two ways in which economists assist the private sector.
Principles of Microeconomics & Principles of Macroeconomics: Ch. 2 Second Canadian Edition
Overview
The Economist as a ScientistThe Economist as a Policy-MakerWhere Economists Disagree and
where Economists Agree
Principles of Microeconomics & Principles of Macroeconomics: Ch. 2 Second Canadian Edition
Do Economists Always Agree With Each Other? Three reasons why they don’t:
Disagree about the validity of
alternative positive theories
Each have different values, thus
different normative views
Advice of charlatans or cranks
complicates ability to agree
Principles of Microeconomics & Principles of Macroeconomics: Ch. 2 Second Canadian Edition
Examples of When Economists (Majority) Do Agree. . .
A ceiling on rents reduces the quantity
and quality of housing available.
Tariffs and import quotas usually
reduce general economic welfare.
Principles of Microeconomics & Principles of Macroeconomics: Ch. 2 Second Canadian Edition
Thinking Like an Economist . . .
Economics uses the scientific approach.
Economics is divided into Microeconomics
and Macroeconomics.
Economics is analyzed through both
Positive and Normative statements.
Principles of Microeconomics & Principles of Macroeconomics: Ch. 2 Second Canadian Edition
Overview
The Economist as a ScientistThe Economist as a Policy-MakerWhere Economists Disagree and
where Economists Agree