Economics
trains you to. . . .
- Think in terms of alternatives.
- Evaluate the cost of individual and social choices.
- Examine and understand how certain events and issues are related.
THE
ECONOMIST AS A SCIENTIST
The
economic way of thinking . . .
- Involves thinking analytically and objectively.
- Makes use of the scientific method.
- Uses abstract models to help explain how a complex, real world operates.
- Develops theories, collects and analyzes data to evaluate the theories.
The
Scientific Method: Observation, Theory, and More Observation
•
Uses abstract models to help explain how a complex, real world operates.
•
Develops theories, collects and analyzes data to evaluate the theories.
•
The economic scientist collect data from event that happened around the
world and histories then studied its effect on economic’s aspect
The
Role of Assumptions
•
Economists make assumptions in order to make the world easier to
understand.
•
The art in scientific thinking is deciding which assumptions to make.
•
Economists use different assumptions to answer different questions based
on each problems circumstance.
•
Economists use models to simplify reality in order to improve our
understanding of the world.
•
Two of the most basic economic
models are:
•
The Circular Flow Diagram
•
The Production Possibilities Frontier
Our
First Model: The Circular-Flow Diagram
•
The circular-flow diagram is a visual model of the economy that
shows how dollars flow through markets among households and firms.Figure 1 The Circular Flow
•
Firms
•
Produce and sell goods and
services
•
Hire and use factors of
production
•
Households
•
Buy and consume goods and
services
•
Own and sell factors of
production
•
Markets for Goods and Services
•
Firms sell
•
Households buy
•
Markets for Factors of Production
•
Households sell
•
Firms buy
•
Factors of Production
•
Inputs used to produce goods and
services
•
Land, labor, and capital
Our
Second Model: The Production Possibilities Frontier
•
The production possibilities frontier is a graph that shows the
combinations of output that the economy can possibly produce given the
available factors of production and the available production technology.
Figure
2 The Production Possibilities Frontier
•
Concepts illustrated by the production possibilities frontier
•
Efficiency
•
Trade-offs
•
Opportunity cost
•
Economic growth
•
Scarcity
Figure
3 A Shift in the Production Possibilities Frontier
Microeconomics
and Macroeconomics
•
Microeconomics focuses on the individual parts of the economy.
•
How households and firms make decisions and how they interact in
specific markets
•
Macroeconomics looks at the economy as a whole.
•
Economy-wide phenomena, including inflation, unemployment, and economic
growth
THE
ECONOMIST AS POLICY ADVISOR
•
When economists are trying to explain the world, they are scientists.
•
When economists are trying to change the world, they are policy
advisors.
Positive
versus Normative Analysis
•
Positive statements are statements that attempt to describe the world as it is.
•
Called descriptive analysis
•
Normative statements are statements about how the world should be.
•
Called prescriptive analysis
WHY
ECONOMISTS DISAGREE
•
They may disagree about the validity of alternative positive theories
about how the world works.
•
They may have different values and, therefore, different normative views
about what policy should try to accomplish.
Source : Principles of Economics, N. Gregory Mankiw
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