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Thinking Like an EconomistChapter 2Copyright 2019 by Harcourt,Inc.Allrightsreserved.Requestsforpermissiontomakecopiesofanypartoftheworkshouldbemailedto:PermissionsDepartment,HarcourtCollegePublishers,6277SeaHarborDrive,Orlando,Florida32887-6777.Harcourt,Inc.itemsandderiveditemscopyright2001byHarcourt,Inc.Every field of study has its own terminologyMathematicsaxiomsintegralsvector spacesPsychologyegoidcognitive dissonanceLawtortsvenuesPromissory estoppelHarcourt,Inc.itemsandderiveditemscopyright2001byHarcourt,Inc.Every field of study has its own terminologyEconomicsSupplyDemandElasticityConsumer SurplusComparative advantageOpportunity costDeadweight lossHarcourt,Inc.itemsandderiveditemscopyright2001byHarcourt,Inc.Economics trains you to.uThink in terms of alternatives.uEvaluate the cost of individual and social choices.uExamine and understand how certain events and issues are related.Harcourt,Inc.itemsandderiveditemscopyright2001byHarcourt,Inc.The Economist as a ScientistThe economic way of thinking.uInvolves thinking analytically and objectively.uMakes use of the scientific method.Harcourt,Inc.itemsandderiveditemscopyright2001byHarcourt,Inc.The Scientific MethoduUses abstract models to help explain how a complex,real world operates.uDevelops theories,collects,and analyzes data to prove the theories.Observation,Theory and More Observation!Harcourt,Inc.itemsandderiveditemscopyright2001byHarcourt,Inc.The Role of Assumptionsu Economists make assumptions in order to make the world easier to understand.u The art in scientific thinking is deciding which assumptions to make.u Economists use different assumptions to answer different questions.Harcourt,Inc.itemsandderiveditemscopyright2001byHarcourt,Inc.The Economic Way of ThinkinguIncludes developing abstract models from theories and the analysis of the models.uUses two approaches:uDescriptive(reportingfacts,etc.)uAnalytical(abstractreasoning)Harcourt,Inc.itemsandderiveditemscopyright2001byHarcourt,Inc.Economic Modelsu Economists use models to simplify reality in order to improve our understanding of the worldu Two of the most basic economic models include:uThe Circular Flow ModeluThe Production Possibilities FrontierHarcourt,Inc.itemsandderiveditemscopyright2001byHarcourt,Inc.The Circular-Flow ModelThe circular-flow model is a simple way to visually show the economic transactions that occur between households and firms in the economy.Harcourt,Inc.itemsandderiveditemscopyright2001byHarcourt,Inc.The Circular-Flow DiagramFirmsHouseholdsMarket for Factors of ProductionMarket for Goods and ServicesSpendingRevenueWages,rent,and profitIncomeGoods&Services soldGoods&Services boughtLabor,land,and capitalInputs for productionHarcourt,Inc.itemsandderiveditemscopyright2001byHarcourt,Inc.The Circular-Flow DiagramHouseholdsu Buy and consume goods and servicesu Own and sell factors of productionFirmsu Produce and sell goods and servicesu Hire and use factors of productionHarcourt,Inc.itemsandderiveditemscopyright2001byHarcourt,Inc.The Circular-Flow DiagramMarkets for Factors of Productionu Households sellu Firms buyMarkets for Goods&ServicesuFirms sellu Households buyHarcourt,Inc.itemsandderiveditemscopyright2001byHarcourt,Inc.The Circular-Flow DiagramFactors of Productionu Inputs used to produce goods and servicesu Land,labor,and capitalHarcourt,Inc.itemsandderiveditemscopyright2001byHarcourt,Inc.The Production Possibilities FrontierThe production possibilities frontier is a graph showing the various combinations of output that the economy can possibly produce given the available factors of production and technology.Harcourt,Inc.itemsandderiveditemscopyright2001byHarcourt,Inc.The Production Possibilities FrontierQuantity ofComputersProducedQuantity ofCars Produced3,00001,0002,0007001,000300AB2,200600CDHarcourt,Inc.itemsandderiveditemscopyright2001byHarcourt,Inc.The Production Possibilities FrontierQuantity ofComputersProducedQuantity ofCars Produced3,0001,0002,0002,200A70060030001,000BCDProductionpossibilitiesfrontierHarcourt,Inc.itemsandderiveditemscopyright2001byHarcourt,Inc.Concepts Illustrated by the Production Possibilities FrontieruEfficiencyuTradeoffsuOpportunity CostuEconomic GrowthHarcourt,Inc.itemsandderiveditemscopyright2001byHarcourt,Inc.4,000The Production Possibilities FrontierQuantity of ComputersProducedQuantity ofCars Produced3,0002,000A70001,000E2,100750An outward shift in the production possibilities frontierHarcourt,Inc.itemsandderiveditemscopyright2001byHarcourt,Inc.Microeconomics and MacroeconomicsuMicroeconomics focuses on the individual parts of the economy.uHow households and firms make decisions and how they interact in specific marketsuMacroeconomics looks at the economy as a whole.uHow the markets,as a whole,interact at the national level.Harcourt,Inc.itemsandderiveditemscopyright2001byHarcourt,Inc.Two Roles of EconomistsuWhen they are trying to explain the world,they are scientists.uWhen they are trying to change the world,they are policymakers.Harcourt,Inc.itemsandderiveditemscopyright2001byHarcourt,Inc.Positive versus Normative AnalysisuPositive statements are statements that describe the world as it is.uCalled descriptive analysisuNormative statements are statements about how the world should be.uCalled prescriptive analysisHarcourt,Inc.itemsandderiveditemscopyright2001byHarcourt,Inc.?Positive or Normative Statements?An increase in the minimum wage will cause a decrease in employment among the least-skilled.Harcourt,Inc.itemsandderiveditemscopyright2001byHarcourt,Inc.?Positive or Normative Statements?Higher federal budget deficits will cause interest rates to increase.Harcourt,Inc.itemsandderiveditemscopyright2001byHarcourt,Inc.?Positive or Normative Statements?The income gains from a higher minimum wage are worth more than any slight reductions in employment.Harcourt,Inc.itemsandderiveditemscopyright2001byHarcourt,Inc.?Positive or Normative Statements?State governments should be allowed to collect from tobacco companies the costs of treating smoking-related illnesses among the poor.Harcourt,Inc.itemsandderiveditemscopyright2001byHarcourt,Inc.Economists in Washington.serve as advisers in the policymaking process of the three branches of government:uLegislativeuExecutiveuJudicialHarcourt,Inc.itemsandderiveditemscopyright2001byHarcourt,Inc.Why Economists DisagreeuThey may disagree on theories about how the world works.uThey may hold different values and,thus,different normative views.Harcourt,Inc.itemsandderiveditemscopyright2001byHarcourt,Inc.Examples of What Most Economists Agree OnuA ceiling on rents reduces the quantity and quality of housing available.uTariffs and import quotas usually reduce general economic welfare.Harcourt,Inc.itemsandderiveditemscopyright2001byHarcourt,Inc.SummaryuIn order to address subjects with objectivity,economics makes use of the scientific method.uThe field of economics is divided into two subfields:microeconomics and macroeconomics.Harcourt,Inc.itemsandderiveditemscopyright2001byHarcourt,Inc.SummaryuEconomics relies on both positive and normative analysis.Positive statements assert how the world“is”while normative statements assert how the world“should be.”uEconomists may offer conflicting advice due to differences in scientific judgments or to differences in values.Harcourt,Inc.itemsandderiveditemscopyright2001byHarcourt,Inc.Graphical ReviewHarcourt,Inc.itemsandderiveditemscopyright2001byHarcourt,Inc.The Circular-Flow DiagramFirmsHouseholdsMarket for Factors of ProductionMarket for Goods and ServicesSpendingRevenueWages,rent,and profitIncomeLabor,land,and capitalInputs for productionGoods&Services soldGoods&Services boughtHarcourt,Inc.itemsandderiveditemscopyright2001byHarcourt,Inc.The Production Possibilities FrontierQuantity ofComputersProducedQuantity ofCars Produced3,00001,0002,0007001,000300AB2,200600CDHarcourt,Inc.itemsandderiveditemscopyright2001byHarcourt,Inc.The Production Possibilities FrontierQuantity ofComputersProducedQuantity ofCars Produced3,0001,0002,0002,200A70060030001,000BCDProductionpossibilitiesfrontierHarcourt,Inc.itemsandderiveditemscopyright2001byHarcourt,Inc.The Production Possibilities Frontier4,000Quantity of ComputersProducedQuantity ofCars Produced3,0002,000A70001,000E2,100750An outward shift in the production possibilities frontier谢谢！
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