Chapter 2: Thinking Like an Economist PDF

Subject ECO202: Principles of Microeconomics Chapter 2: Thinking Like an Economist Instructor: Vrak Thanit Teaching Manual  Table of Content 01 Discussion 02 Review 03 Class Activities...

Subject ECO202: Principles of Microeconomics Chapter 2: Thinking Like an Economist Instructor: Vrak Thanit Teaching Manual  Table of Content 01 Discussion 02 Review 03 Class Activities 04 Homework & Exercise 2  John Maynard Keynes The study of economics does not seem to require any specialized gifts of an unusually high order. Is it not... a very easy subject compared with the higher branches of philosophy or pure science? “An easy subject, at which very few excel! The paradox finds its explanation, perhaps, in that the master-economist must possess a rare combination of gifts. He must be mathematician, historian, statesman, philosopher—in some degree. He must understand symbols and speak in words. He must contemplate the particular in terms of the general, and touch abstract and concrete in the same flight of thought. He must study the present in the light of the past for the purposes of the future. No part of man’s nature or his institutions must lie entirely outside his regard. He must be purposeful and disinterested in a simultaneous mood; as aloof and incorruptible as an artist, yet sometimes as near the earth as a politician. British Economist Book: The General Theory of Employment, Interest and Money 3  1. Discussion 1. What is the scientific method? Why do we need scientific methods in studying social science? 2. What is the connection between the assumptions and models? How useful are they in the real world? 3. How much do you forgo others if you choose one thing? How do we calculate opportunity cost? 4. What is a production possibilities frontier? 5. How do money and products/services move around the world? 4  2. Review: Key Concept Circular Flow Economists Diagram Model and Assumption Production Scientists Scientific Method Possibilities Frontier Positive Statement Economic &Public Normative Policy Makers Policies Statement 5  2. Review: Learning Outcome Economists as Economists as Micro v.s Macro Scientist Policy Makers Microeconomics: Build assumptions and Establish policies => models (simplify the world) improvement 1. Two actors: (households and firms) Example: Circular Flow Example: poverty reduction, Diagram and Possibility 2. Purposes: understand minimum wage, tax decision making of and Frontier (2 actors and 2 goods) Make normative statement interaction b/t the 2 actors (How the world ought to be) Make positive Statement base on opinion Macroeconomics: (How the world is?) 1. Actors: whole economy base on data Conflicting advices due to different opinions and 2. Purposes: understand 6 judgment forces and trend  2. Review: Synthesis The fundamental lessons are: (1) Economists try to be objective as scientists through making assumption and building model to create a positive statement in understanding the world around them; (2) Economists as policy makers make normative statements, providing opinions on how to improve the economy; however, the advices can be offer differently; and (3) economics is divided to study the decision making of and interaction among actors at low level, known as microeconomics, and to understand the forces and trend at the whole economy, called macroeconomics. 7  3. Class Activities: Production Possibility Frontier Touching the wall game 8  3. Class Activities: Production Possibility Frontier Key Take away 1. You can not do all things at the same time 2. If there are two things, by trying to work on one thing, you give up the opportunity to work on another thing => Opportunity cost of producing A = Giving up B 3. You have a maximum limit of trying to produce both A and B 9  3. Class Activities: Thining like Economist Look at the textbook: Explain the Broken window fallacy 10  3. Class Activities: Positive v.s. Normative Statement Your dormitory roommate plays loud music most of the time; you, however, would prefer more peace and quiet. You suggest that she buy some earphones. She responds that although she would be happy to use earphones, she has many other things that she would prefer to spend her money on right now. You discuss this situation with a friend who is an economics major. The following exchange takes place: 11  3. Class Activities: Positive v.s. Normative Statement (con’t) He: How much would it cost to buy earphones? You: $15. He: How much do you value having some peace and quiet for the rest of the semester? You: $30. He: It is efficient for you to buy the earphones and give them to your roommate. You gain more than you lose; the benefit exceeds the cost. You should do that. You: It just isn’t fair that I have to pay for the earphones when I’m not the one making the noise. 12  3. Class Activities: Positive v.s. Normative Statement (con’t) a. Which parts of this conversation contain positive statements and which parts contain normative statements? b. Construct an argument supporting your viewpoint that your roommate should be the one to change her behavior. Similarly, construct an argument from the viewpoint of your roommate that you should be the one to buy the earphones. 13  3. Class Activities: Disagreement in Policies Look at the situation of the two individuals. Peter is working as the doctor with an income of $150,000 and is taxed $15,000, or 10 percent of his income. Christ work as an actor with income of $30,000 and is taxed $6,000, or 20 percent of her income. Discussion & Debate: Is the tax imposed on these two individuals fair or not? 14  4. Homework and Exercises Quick Quiz 1. An economic model is a mechanical machine that replicates the functioning of the economy. b. a fully detailed, realistic description of the economy. c. a simplified representation of some aspect of the economy. d. a computer program that predicts the future of the economy. 15  4. Homework and Exercises Quick Quiz 2. The circular-flow diagram illustrates that, in markets for the factors of production, a. households are sellers, and firms are buyers. b. households are buyers, and firms are sellers. c. households and firms are both buyers. d. households and firms are both sellers. 16  4. Homework and Exercises Quick Quiz 3. A point inside the production possibilities frontier is a. efficient but not feasible. b. feasible but not efficient. c. both efficient and feasible. d. neither efficient nor feasible. 17  4. Homework and Exercises Quick Quiz 4. An economy produces hot dogs and hamburgers. If a discovery of the remarkable health benefits of hot dogs were to change consumers’ preferences, it would a. expand the production possibilities frontier. b. contract the production possibilities frontier. c. move the economy along the production possibilities frontier. d. move the economy inside the production possibilities frontier. 18  4. Homework and Exercises Quick Quiz 5. All of the following topics fall within the study of microeconomics EXCEPT a. the impact of cigarette taxes on the smoking behavior of teenagers. b. the role of Microsoft’s market power in the pricing of software. c. the effectiveness of antipoverty programs in reducing homelessness. d. the influence of the government budget deficit on economic 19 growth.  4. Homework and Exercises Quick Quiz 6. Which of the following is a positive, rather than a normative, statement? a. Law X will reduce national income. b. Law X is a good piece of legislation. c. Congress ought to pass law X. d. The president should veto law X. 20  4. Homework and Exercises Quick Quiz 7. Classify the following topics as relating to microeconomics or macroeconomics. a. a family’s decision about how much income to save b. the effect of government regulations on auto emissions c. the impact of higher national saving on economic growth d. a firm’s decision about how many workers to hire e. the relationship between the inflation rate and changes 21 in the quantity of money  4. Homework and Exercises Quick Quiz 8. The mayor of Gotham City, worried about a potential epidemic of deadly influenza this winter, asks an economic adviser the following series of questions. Determine whether a question requires the economic adviser to make a positive assessment or a normative assessment. a. How much vaccine will be in stock in the city by the end of November? b. If we offer to pay 10% more per dose to the pharmaceutical companies providing the vaccines, will they provide additional doses? 22  4. Homework and Exercises Quick Quiz c. If there is a shortage of vaccine in the city, whom should we vaccinate first—the elderly or the very young? (Assume that a person from one group has an equal likelihood of dying from influenza as a person from the other group.) d. If the city charges $25 per shot, how many people will pay? e. If the city charges $25 per shot, it will make a profit of $10 per shot, money that can go to pay for inoculating poor people. Should the city engage in such a scheme? 23  4. Homework and Exercises Homework: Question for Review 1. Should an economic model describe reality exactly? 2. Use a production possibilities frontier to describe the idea of “efficiency. 3. Why do economists sometimes offer conflicting advice? 24  4. Homework and Exercises Homework: Problems & Applications 1. The first principle of economics discussed in Chapter 1 is that people face trade-offs. Use a production possibilities frontier to illustrate society’s trade-off between two “goods”—a clean environment and the quantity of industrial output. What do you suppose determines the shape and position of the frontier? Show what happens to the frontier if engineers develop a new way of producing electricity that emits fewer pollutants. 25  A picture is worth a thousand words “All models are wrong, but some are useful. Model is not the reality, but it is the reflection of reality” 26