Chapter 2: Thinking Like an Economist (PDF)

Chapter 2: Thinking Like an Economist Shuo Xu September 12, 2024 1/19 The Scientific Method in Economics I Economists observe real-world phenomena, develop theories, and analyze data. I Assumptions simplify the com...

Chapter 2: Thinking Like an Economist Shuo Xu September 12, 2024 1/19 The Scientific Method in Economics I Economists observe real-world phenomena, develop theories, and analyze data. I Assumptions simplify the complex reality to understand cause and effect. I Testing hypotheses is a key part of economic analysis. 2/19 The Role of Assumptions I Economists make assumptions to simplify the world and make it easier to understand. I Example: In models of international trade, economists assume only two countries to focus on trade patterns. 3/19 Economic Models I Models are simplified representations of reality used to analyze economic situations. I Key models include the Circular-Flow Diagram and the Production Possibilities Frontier (PPF). 4/19 Circular-Flow Diagram I A model that shows the flow of goods and services between households and firms in the economy. I Two main markets: 1. Market for goods and services 2. Market for factors of production 5/19 Production Possibilities Frontier (PPF) I The PPF shows the trade-offs between producing two goods. I Illustrates opportunity costs, efficiency, and economic growth. 6/19 Production Possibilities Frontier (PPF) I The PPF shows the trade-offs between producing two goods. I Illustrates opportunity costs, efficiency, and economic growth. 7/19 Microeconomics vs Macroeconomics I Microeconomics studies individual markets and decision-makers (households and firms). I Macroeconomics focuses on broader economic factors like inflation, unemployment, and national income. 8/19 Quick Quiz 1.An economic model is I a mechanical machine that replicates the functioning of the economy. I a fully detailed, realistic description of the economy. I a simplified representation of some aspect of the economy. I a computer program that predicts the future of the economy. 9/19 Quick Quiz 2. The circular-flow diagram illustrates that, in markets for the factors of production, I households are sellers, and firms are buyers. I households are buyers, and firms are sellers. I households and firms are both buyers. I households and firms are both sellers. 10/19 Quick Quiz A point inside the production possibilities frontier is I efficient but not feasible. I feasible but not efficient. I both efficient and feasible. I neither efficient nor feasible. 11/19 Quick Quiz All of the following topics fall within the study of microeconomics EXCEPT I the impact of cigarette taxes on the smoking behavior of teenagers. I the role of Microsoft’s market power in the pricing of software. I the effectiveness of antipoverty programs in reducing homelessness. I the influence of the government’s budget deficit on economic growth. 12/19 Positive vs Normative Analysis I Positive Statements: Objective and fact-based. I Normative Statements: Subjective and value-based. I Example: I Positive: ”Increasing the minimum wage will reduce employment.” I Normative: ”The government should raise the minimum wage.” 13/19 Economists as Policy Advisers I Economists often provide advice to policymakers based on positive analysis. I Example: Advising on minimum wage laws, taxation, and healthcare reforms. 14/19 Quick Quiz 5.Which of the following is a positive, rather than a normative, statement? I Law X will reduce national income. I Law X is a good piece of legislation. I Congress ought to pass law X. I The president should veto law X. 15/19 Quick Quiz 6. The following parts of government regularly rely on the advice of economists: I Department of the Treasury. I Office of Management and Budget. I Department of Justice. I All of the above.. 16/19 Why Economists Disagree I Differences in scientific judgments and models. I Differences in values (e.g., fairness vs. efficiency). 17/19 Quick Quiz 7. Economists may disagree because they have different I hunches about the validity of alternative theories. I judgments about the size of key parameters. I political philosophies about the goals of public policy. I All of the above. 18/19 Quick Quiz 8. Most economists believe that tariffs are I a good way to promote domestic economic growth. I a poor way to raise general economic well-being. I an often necessary response to foreign competition. I an efficient way for the government to raise revenue. 19/19