Chapter 2 Thinking Like An Economist PDF

Principles of Economics, Ninth Edition N. Gregory Mankiw PowerPoint Slides prepared by: V. Andreea CHIRITESCU Eastern Illinois University N. Gregory Mankiw, Principl...

Principles of Economics, Ninth Edition N. Gregory Mankiw PowerPoint Slides prepared by: V. Andreea CHIRITESCU Eastern Illinois University N. Gregory Mankiw, Principles of Economics, 9th Edition © 2021 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or 1 posted to a publicly accessible website, in whole or in part.  Chapter 2 Thinking Like an Economist N. Gregory Mankiw, Principles of Economics, 9th Edition © 2021 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or 2 posted to a publicly accessible website, in whole or in part.  The Economist as a Scientist, Part 1 Economics is a science Economists are scientists – Devise theories – Collect data – Analyze these data “I’m a social scientist, Verify or refute their Michael. That means I can’t explain electricity theories or anything like that, but if you ever want to know – Use the scientific method about people, I’m your man.” N. Gregory Mankiw, Principles of Economics, 9th Edition © 2021 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or 3 posted to a publicly accessible website, in whole or in part.  The Economist as a Scientist, Part 2 Scientific method – Dispassionate development and testing of theories about how the world works – Observation, theory, more observation Conducting experiments in economics – Is often impractical Substitute for laboratory experiments – Economists pay close attention to the natural experiments offered by history N. Gregory Mankiw, Principles of Economics, 9th Edition © 2021 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or 4 posted to a publicly accessible website, in whole or in part.  The Economist as a Scientist, Part 3 The role of assumptions Assumptions – Can simplify the complex world and make it easier to understand – The art in scientific thinking: deciding which assumptions to make Different assumptions – To answer different questions – To study short-run or long-run effects N. Gregory Mankiw, Principles of Economics, 9th Edition © 2021 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or 5 posted to a publicly accessible website, in whole or in part.  The Economist as a Scientist, Part 4 Economic models – Diagrams and equations – Omit many details – Allow us to see what’s truly important – Built with assumptions – Simplify reality to improve our understanding of it N. Gregory Mankiw, Principles of Economics, 9th Edition © 2021 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or 6 posted to a publicly accessible website, in whole or in part.  The Economist as a Scientist, Part 5 Circular-flow diagram – Visual model of the economy – Shows how dollars flow through markets among households and firms Two decision makers – Firms and Households Two markets – For goods and services – For factors of production (inputs) N. Gregory Mankiw, Principles of Economics, 9th Edition © 2021 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or 7 posted to a publicly accessible website, in whole or in part.  The Economist as a Scientist, Part 6 Firms – Produce goods and services – Use factors of production (inputs) Households – Own factors of production – Consume goods and services N. Gregory Mankiw, Principles of Economics, 9th Edition © 2021 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or 8 posted to a publicly accessible website, in whole or in part.  The Economist as a Scientist, Part 7 Firms and Households interact in markets Markets for goods and services – Firms are sellers – Households are buyers Markets for factors of production – Firms are buyers – Households are sellers N. Gregory Mankiw, Principles of Economics, 9th Edition © 2021 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or 9 posted to a publicly accessible website, in whole or in part. Figure 1 The Circular Flow This diagram is a schematic representation of the organization of the economy. Decisions are made by households and firms. Households and firms interact in the markets for goods and services (where households are buyers and firms are sellers) and in the markets for the factors of production (where firms are buyers and households are sellers). The outer set of arrows shows the flow of dollars, and the inner set of arrows shows the corresponding flow of inputs and outputs. N. Gregory Mankiw, Principles of Economics, 9th Edition © 2021 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 10  The Economist as a Scientist, Part 8 Production possibilities frontier – A graph – Combinations of output that the economy can possibly produce – Given the available Factors of production Production technology N. Gregory Mankiw, Principles of Economics, 9th Edition © 2021 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or 11 posted to a publicly accessible website, in whole or in part. Figure 2 The Production Possibilities Frontier The production possibilities frontier shows the combinations of output—in this case, cars and computers —that the economy can possibly produce. The economy can produce any combination on or inside the frontier. Points outside the frontier are not feasible given the economy’s resources. The slope of the production possibilities frontier measures the opportunity cost of a car in terms of computers. This opportunity cost varies, depending on how much of the two goods the economy is producing. N. Gregory Mankiw, Principles of Economics, 9th Edition © 2021 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 12  The Economist as a Scientist, Part 9 Efficient levels of production – The economy is getting all it can from the scarce resources available – Points on the production possibilities frontier – Trade-off: The only way to produce more of one good is to produce less of the other good Moving from point A to point B: give up 200 computers to produce 100 more cars N. Gregory Mankiw, Principles of Economics, 9th Edition © 2021 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or 13 posted to a publicly accessible website, in whole or in part.  The Economist as a Scientist, Part 10 Inefficient levels of production – Points inside production possibilities frontier Opportunity cost of producing one good – Give up producing units of the other good – Slope of the production possibilities frontier N. Gregory Mankiw, Principles of Economics, 9th Edition © 2021 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or 14 posted to a publicly accessible website, in whole or in part.  The Economist as a Scientist, Part 11 Bowed outward production possibilities frontier – Opportunity cost of a car is highest When the economy is producing many cars and fewer computers – Opportunity cost of a car is lower When the economy is producing fewer cars and many computers – Resource specialization N. Gregory Mankiw, Principles of Economics, 9th Edition © 2021 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or 15 posted to a publicly accessible website, in whole or in part.  The Economist as a Scientist, Part 12 Technological advance – Outward shift of the production possibilities frontier – Economic growth – Produce more of both goods N. Gregory Mankiw, Principles of Economics, 9th Edition © 2021 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or 16 posted to a publicly accessible website, in whole or in part. Figure 3 A Shift in the Production Possibilities Frontier A technological advance in the computer industry enables the economy to produce more computers for any given number of cars. As a result, the production possibilities frontier shifts outward. If the economy moves from point A to point G, then the production of both cars and computers increases. N. Gregory Mankiw, Principles of Economics, 9th Edition © 2021 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 17  The Economist as a Scientist, Part 13 Microeconomics – The study of how households and firms make decisions and how they interact in markets Macroeconomics – The study of economy-wide phenomena, including inflation, unemployment, and economic growth N. Gregory Mankiw, Principles of Economics, 9th Edition © 2021 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or 18 posted to a publicly accessible website, in whole or in part.