ThinkingLikeanEconomistChapter2Copyright?2001byHarcourt,Inc.

Allrightsreserved.

Requestsforpermissiontomakecopiesofanypartofthe

workshouldbemailedto:PermissionsDepartment,HarcourtCollegePublishers,

6277SeaHarborDrive,Orlando,Florida32887-6777.

ThinkingLikeanEconomistChap1EveryfieldofstudyhasitsownterminologyMathematicsaxiomsintegralsvectorspacesPsychologyegoidcognitivedissonanceLawtortsvenuesPromissoryestoppelEveryfieldofstudyhasitso2EveryfieldofstudyhasitsownterminologyEconomicsSupplyDemandElasticityConsumerSurplusComparativeadvantageOpportunitycostDeadweightlossEveryfieldofstudyhasitso3Economicstrainsyouto....Thinkintermsofalternatives.Evaluatethecostofindividualandsocialchoices.Examineandunderstandhowcertaineventsandissuesarerelated.Economicstrainsyouto....4TheEconomistasaScientistTheeconomicwayofthinking...Involvesthinkinganalytically

and

objectively.Makesuseofthe

scientificmethod.TheEconomistasaScientistTh5TheScientificMethodUsesabstractmodelstohelpexplainhowacomplex,realworldoperates.

Developstheories,collects,andanalyzesdatatoprovethetheories.Observation,TheoryandMoreObservation!TheScientificMethodUsesabst6TheRoleofAssumptionsEconomistsmakeassumptionsinordertomaketheworldeasiertounderstand.Theartinscientificthinkingisdecidingwhichassumptionstomake.Economistsusedifferentassumptionstoanswerdifferentquestions.TheRoleofAssumptionsEconom7TheEconomicWayofThinkingIncludesdevelopingabstractmodelsfromtheoriesandthe

analysisofthemodels.Usestwoapproaches:Descriptive(reportingfacts,etc.)Analytical(abstractreasoning)TheEconomicWayofThinkingIn8EconomicModelsEconomistsusemodelstosimplifyrealityinordertoimproveourunderstandingoftheworldTwoofthemostbasiceconomicmodelsinclude:TheCircularFlowModelTheProductionPossibilitiesFrontierEconomicModelsEconomistsuse9TheCircular-FlowModelThe

circular-flowmodel

isasimplewaytovisuallyshowtheeconomictransactionsthatoccurbetweenhouseholdsandfirmsintheeconomy.TheCircular-FlowModelThecir10TheCircular-FlowDiagramFirmsHouseholdsMarketforFactorsofProductionMarketforGoodsandServicesSpendingRevenueWages,rent,andprofitIncomeGoods&ServicessoldGoods&ServicesboughtLabor,land,andcapitalInputsforproductionTheCircular-FlowDiagramFirms11TheCircular-FlowDiagramHouseholds

BuyandconsumegoodsandservicesOwnandsellfactorsofproductionFirms

ProduceandsellgoodsandservicesHireandusefactorsofproductionTheCircular-FlowDiagramHouse12TheCircular-FlowDiagramMarketsforFactorsofProduction

HouseholdssellFirmsbuyMarketsforGoods&Services

FirmssellHouseholdsbuyTheCircular-FlowDiagramMarke13TheCircular-FlowDiagramFactorsofProduction

InputsusedtoproducegoodsandservicesLand,labor,andcapitalTheCircular-FlowDiagramFacto14TheProductionPossibilitiesFrontierTheproductionpossibilitiesfrontierisagraphshowingthevariouscombinationsofoutputthattheeconomycanpossiblyproducegiventheavailablefactorsofproductionandtechnology.TheProductionPossibilitiesF15TheProductionPossibilitiesFrontierQuantityofComputersProducedQuantityofCarsProduced3,00001,0002,0007001,000300AB2,200600CDTheProductionPossibilitiesF16TheProductionPossibilitiesFrontierQuantityofComputersProducedQuantityofCarsProduced3,0001,0002,0002,200A70060030001,000BCDProductionpossibilitiesfrontierTheProductionPossibilitiesF17ConceptsIllustratedbytheProductionPossibilitiesFrontierEfficiencyTradeoffsOpportunityCostEconomicGrowthConceptsIllustratedbythePr184,000TheProduction

PossibilitiesFrontierQuantityofComputersProducedQuantityofCarsProduced3,0002,000A70001,000E2,100750Anoutwardshiftintheproductionpossibilitiesfrontier4,000TheProduction

Possibili19MicroeconomicsandMacroeconomicsMicroeconomics

focusesontheindividualpartsoftheeconomy.HowhouseholdsandfirmsmakedecisionsandhowtheyinteractinspecificmarketsMacroeconomics

looksattheeconomyasawhole.Howthemarkets,asawhole,interactatthenationallevel.

MicroeconomicsandMacroeconom20TwoRolesofEconomistsWhentheyaretryingtoexplaintheworld,theyare

scientists.Whentheyaretryingtochangetheworld,theyare

policymakers.TwoRolesofEconomistsWhenth21PositiveversusNormativeAnalysisPositivestatements

arestatementsthatdescribetheworldasitis.

CalleddescriptiveanalysisNormativestatements

arestatementsabouthowtheworldshouldbe.CalledprescriptiveanalysisPositiveversusNormativeAnal22??PositiveorNormativeStatements?Anincreaseintheminimumwagewillcauseadecreaseinemploymentamongtheleast-skilled.??PositiveorNormativeStatem23???PositiveorNormativeStatements?Higherfederalbudgetdeficitswillcauseinterestratestoincrease.???PositiveorNormativeState24????PositiveorNormativeStatements?Theincomegainsfromahigherminimumwageareworthmorethananyslightreductionsinemployment.????PositiveorNormativeStat25???PositiveorNormativeStatements?Stategovernmentsshouldbeallowedtocollectfromtobaccocompaniesthecostsoftreatingsmoking-relatedillnessesamongthepoor.???PositiveorNormativeState26EconomistsinWashington... ...serveasadvisersinthepolicymakingprocessofthethreebranchesofgovernment:LegislativeExecutiveJudicialEconomistsinWashington...27WhyEconomistsDisagreeTheymaydisagreeontheoriesabouthowtheworldworks.

Theymayholddifferentvaluesand,thus,differentnormativeviews.

WhyEconomistsDisagreeTheyma28ExamplesofWhatMostEconomistsAgreeOnAceilingonrentsreducesthequantityandqualityofhousingavailable.

Tariffsandimportquotasusuallyreducegeneraleconomicwelfare.ExamplesofWhatMostEconomis29SummaryInordertoaddresssubjectswithobjectivity,economicsmakesuseofthescientificmethod.

Thefieldofeconomicsisdividedintotwosubfields:microeconomicsandmacroeconomics.SummaryInordertoaddresssub30SummaryEconomicsreliesonbothpositiveandnormativeanalysis.Positivestatementsasserthowtheworld“is”whilenormativestatementsasserthowtheworld“shouldbe.”Economistsmayofferconflictingadviceduetodifferencesinscientificjudgmentsortodifferencesinvalues.SummaryEconomicsreliesonbot31GraphicalReviewGraphicalReview32TheCircular-FlowDiagramFirmsHouseholdsMarketforFactorsofProductionMarketforGoodsandServicesSpendingRevenueWages,rent,andprofitIncomeLabor,land,andcapitalInputsforproductionGoods&ServicessoldGoods&ServicesboughtTheCircular-FlowDiagramFirms33TheProductionPossibilitiesFrontierQuantityofComputersProducedQuantityofCarsProduced3,00001,0002,0007001,000300AB2,200600CDTheProductionPossibilitiesF34TheProductionPossibilitiesFrontierQuantityofComputersProducedQuantityofCarsProduced3,0001,0002,0002,200A70060030001,000BCDProductionpossibilitiesfrontierTheProductionPossibilitiesF35TheProduction

PossibilitiesFrontier4,000QuantityofComputersProducedQuantityofCarsProduced3,0002,000A70001,000E2,100750AnoutwardshiftintheproductionpossibilitiesfrontierTheProduction

Possibilities36ThinkingLikeanEconomistChapter2Copyright?2001byHarcourt,Inc.

Allrightsreserved.

Requestsforpermissiontomakecopiesofanypartofthe

workshouldbemailedto:PermissionsDepartment,HarcourtCollegePublishers,

6277SeaHarborDrive,Orlando,Florida32887-6777.

ThinkingLikeanEconomistChap37EveryfieldofstudyhasitsownterminologyMathematicsaxiomsintegralsvectorspacesPsychologyegoidcognitivedissonanceLawtortsvenuesPromissoryestoppelEveryfieldofstudyhasitso38EveryfieldofstudyhasitsownterminologyEconomicsSupplyDemandElasticityConsumerSurplusComparativeadvantageOpportunitycostDeadweightlossEveryfieldofstudyhasitso39Economicstrainsyouto....Thinkintermsofalternatives.Evaluatethecostofindividualandsocialchoices.Examineandunderstandhowcertaineventsandissuesarerelated.Economicstrainsyouto....40TheEconomistasaScientistTheeconomicwayofthinking...Involvesthinkinganalytically

and

objectively.Makesuseofthe

scientificmethod.TheEconomistasaScientistTh41TheScientificMethodUsesabstractmodelstohelpexplainhowacomplex,realworldoperates.

Developstheories,collects,andanalyzesdatatoprovethetheories.Observation,TheoryandMoreObservation!TheScientificMethodUsesabst42TheRoleofAssumptionsEconomistsmakeassumptionsinordertomaketheworldeasiertounderstand.Theartinscientificthinkingisdecidingwhichassumptionstomake.Economistsusedifferentassumptionstoanswerdifferentquestions.TheRoleofAssumptionsEconom43TheEconomicWayofThinkingIncludesdevelopingabstractmodelsfromtheoriesandthe

analysisofthemodels.Usestwoapproaches:Descriptive(reportingfacts,etc.)Analytical(abstractreasoning)TheEconomicWayofThinkingIn44EconomicModelsEconomistsusemodelstosimplifyrealityinordertoimproveourunderstandingoftheworldTwoofthemostbasiceconomicmodelsinclude:TheCircularFlowModelTheProductionPossibilitiesFrontierEconomicModelsEconomistsuse45TheCircular-FlowModelThe

circular-flowmodel

isasimplewaytovisuallyshowtheeconomictransactionsthatoccurbetweenhouseholdsandfirmsintheeconomy.TheCircular-FlowModelThecir46TheCircular-FlowDiagramFirmsHouseholdsMarketforFactorsofProductionMarketforGoodsandServicesSpendingRevenueWages,rent,andprofitIncomeGoods&ServicessoldGoods&ServicesboughtLabor,land,andcapitalInputsforproductionTheCircular-FlowDiagramFirms47TheCircular-FlowDiagramHouseholds

BuyandconsumegoodsandservicesOwnandsellfactorsofproductionFirms

ProduceandsellgoodsandservicesHireandusefactorsofproductionTheCircular-FlowDiagramHouse48TheCircular-FlowDiagramMarketsforFactorsofProduction

HouseholdssellFirmsbuyMarketsforGoods&Services

FirmssellHouseholdsbuyTheCircular-FlowDiagramMarke49TheCircular-FlowDiagramFactorsofProduction

InputsusedtoproducegoodsandservicesLand,labor,andcapitalTheCircular-FlowDiagramFacto50TheProductionPossibilitiesFrontierTheproductionpossibilitiesfrontierisagraphshowingthevariouscombinationsofoutputthattheeconomycanpossiblyproducegiventheavailablefactorsofproductionandtechnology.TheProductionPossibilitiesF51TheProductionPossibilitiesFrontierQuantityofComputersProducedQuantityofCarsProduced3,00001,0002,0007001,000300AB2,200600CDTheProductionPossibilitiesF52TheProductionPossibilitiesFrontierQuantityofComputersProducedQuantityofCarsProduced3,0001,0002,0002,200A70060030001,000BCDProductionpossibilitiesfrontierTheProductionPossibilitiesF53ConceptsIllustratedbytheProductionPossibilitiesFrontierEfficiencyTradeoffsOpportunityCostEconomicGrowthConceptsIllustratedbythePr544,000TheProduction

PossibilitiesFrontierQuantityofComputersProducedQuantityofCarsProduced3,0002,000A70001,000E2,100750Anoutwardshiftintheproductionpossibilitiesfrontier4,000TheProduction

Possibili55MicroeconomicsandMacroeconomicsMicroeconomics

focusesontheindividualpartsoftheeconomy.HowhouseholdsandfirmsmakedecisionsandhowtheyinteractinspecificmarketsMacroeconomics

looksattheeconomyasawhole.Howthemarkets,asawhole,interactatthenationallevel.

MicroeconomicsandMacroeconom56TwoRolesofEconomistsWhentheyaretryingtoexplaintheworld,theyare

scientists.Whentheyaretryingtochangetheworld,theyare

policymakers.TwoRolesofEconomistsWhenth57PositiveversusNormativeAnalysisPositivestatements

arestatementsthatdescribetheworldasitis.

CalleddescriptiveanalysisNormativestatements

arestatementsabouthowtheworldshouldbe.CalledprescriptiveanalysisPositiveversusNormativeAnal58??PositiveorNormativeStatements?Anincreaseintheminimumwagewillcauseadecreaseinemploymentamongtheleast-skilled.??PositiveorNormativeStatem59???PositiveorNormativeStatements?Higherfederalbudgetdeficitswillcauseinterestratestoincrease.???PositiveorNormativeState60????PositiveorNormativeStatements?Theincomegainsfromahigherminimumwageareworthmorethananyslightreductionsinemployment.????PositiveorNormativeStat61???PositiveorNormativeStatements?Stategovernmentsshouldbeallowedtocollectfromtobaccocompaniesthecostsoftreatingsmoking-relatedillnessesamongthepoor.???PositiveorNormativeState62EconomistsinWashington... ...serveasadvisersinthepolicymakingprocessofthethreebranchesofgovernment:LegislativeExecutiveJudicialEconomistsinWashington...63WhyEconomistsDisagreeTheymaydisagreeontheoriesabouthowtheworldworks.

Theymayholddifferentvaluesand,thus,differentnormativeviews.

WhyEconomistsDisagreeTheyma64ExamplesofWhatMostEconomistsAgreeOnAceilingonrentsreducesthequantityandqualityofhousingavailable.

Tariffsandimportquotasusuallyreducege