G1 Econ Chapter 2 PDF

University of San Carlos THINKING LIKE AN ECONOMIST CHAPTER 2 | GROUP 1 September 24, 2024  AGENDA OVERVIEW 01 THINKING LIKE AN ECONOMIST 02...

University of San Carlos THINKING LIKE AN ECONOMIST CHAPTER 2 | GROUP 1 September 24, 2024  AGENDA OVERVIEW 01 THINKING LIKE AN ECONOMIST 02 THE ECONOMIST AS SCIENTIST 03 THE ECONOMIST AS POLICY ADVISER 04 WHY ECONOMISTS DISAGREE University Of San Carlos THINKING LIKE AN ECONOMIST Economists often play a crucial role in shaping public policy by providing insights into how economies function and how policies might affect various aspects of society. However, it is common to see economists offer conflicting advice on the same issue, leading to confusion among policymakers and the public. This frequent disagreement is not simply a result of personal biases or incompetence; rather, it stems from the inherent complexities of economics as a discipline. University Of San Carlos ECONOMIST AS SCIENTIST Economists approach their work with scientific objectivity. Economists study the economy using methods similar to those used by natural scientists, like physicists and biologists. They develop theories, collect data, and analyze this data to validate or challenge their theories. University Of San Carlos ECONOMIST AS SCIENTIST these are some of the ways economists apply the logic of science to examine how an economy works: THE SCIENTIFIC METHOD: OBSERVATION, THEORY, AND MORE OBSERVATION The scientific method involves observation, theory, and further observation. An example is Isaac Newton observing an apple fall, which led him to develop a theory of gravity. Similarly, in economics, observations like rapidly increasing prices can lead to theories, such as the idea that inflation is caused by excessive money printing. Economists test these theories by collecting and analyzing data, as with the strong correlation between money growth and inflation. University Of San Carlos ECONOMIST AS SCIENTIST these are some of the ways economists apply the logic of science to examine how an economy works: THE ROLE OF ASSUMPTIONS Both physicists and economists use assumptions to simplify complex realities. A physicist might assume a marble falls in a vacuum, even though this isn’t true, because the assumption makes calculations easier and the difference in outcome is negligible. Economists make similar assumptions, such as reducing the global economy to two countries with two goods, to better focus on the essence of economic problems. ECONOMIC MODELS Just as biology teachers use simplified plastic models to explain the human body, economists use diagrams and equations to model the economy. These models intentionally omit many details to focus on the most important aspects of the economy, simplifying reality to enhance understanding. University Of San Carlos ECONOMIST AS SCIENTIST these are some of the ways economists apply the logic of science to examine how an economy works: OUR FIRST MODEL: THE CIRCULAR-FLOW DIAGRAM The circular-flow diagram simplifies the economy by depicting interactions between households and firms. Households provide factors of production to firms and receive goods and services in return. Firms use these inputs to produce goods and services, generating revenue that flows back to households as income. This basic model highlights the continuous flow of money and resources in the economy. University Of San Carlos ECONOMIST AS SCIENTIST these are some of the ways economists apply the logic of science to examine how an economy works: OUR SECOND MODEL: THE PRODUCTION POSSIBILITIES FRONTIER The Production Possibilities Frontier (PPF) graphically represents the trade-offs between two goods an economy can produce, illustrating concepts of scarcity, efficiency, and opportunity cost. Points on the PPF show efficient production levels, while points inside indicate inefficiencies. The PPF’s bowed shape reflects increasing opportunity costs and shifts outward with economic growth and technological advances. University Of San Carlos ECONOMIST AS SCIENTIST these are some of the ways economists apply the logic of science to examine how an economy works: MICROECONOMICS AND MACROECONOMICS Economics is studied at various levels, from individual decisions to the economy as a whole. Microeconomics focuses on household and firm decisions and market interactions, while macroeconomics examines economy-wide phenomena and overall trends. Both fields are interconnected, with macroeconomic trends arising from microeconomic actions, but they use distinct models and methods for analysis. University Of San Carlos THE ECONOMIST AS POLICY ADVISER Economists are often asked to explain why certain economic events happen. For example, why is unemployment higher among teenagers than older workers? They are also asked to suggest ways to improve the economy. When economists explain what’s happening, they act like scientists. When they suggest improvements, they are policy advisers. University Of San Carlos THE ECONOMIST AS POLICY ADVISER POSITIVE VERSUS NORMATIVE ANALYSIS To clarify the two roles that economists play, it could be explained through language. Because scientists and policy advisers have different goals, they use language in different ways. Positive statements describe the world as it is and can be tested or confirmed with evidence. Normative statements suggest how the world should be and involve value judgments. example: Portia: Minimum-wage laws cause unemployment. Noah: The government should raise the minimum wage University Of San Carlos THE ECONOMIST AS POLICY ADVISER ECONOMISTS IN WASHINGTON President Harry Truman once joked about wanting a "one-armed economist" because economists often say, "On the one hand… on the other hand," when giving advice. This is because they know most decisions involve trade-offs. For example, a policy might boost efficiency but reduce fairness, or help future generations while making things harder for people today. That's why no honest economist will say that policy choices are simple. WHY ECONOMISTS' ADVICE IS NOT ALWAYS FOLLOWED Any economist who advises presidents or other elected leaders knows that his recommendations are not always followed. Because making policy in the real world, is far more complex than the ones found in textbooks. While economists focus on finding the best policy, a president must also consider how it will be relayed to the public, how the media and congress will react, and its political impact. In a democracy, policy decisions involve balancing many factors, so economists' advice is just one part of the bigger picture. University Of San Carlos WHY ECONOMISTS DISAGREE Every field of study has its own language and unique way of thinking. Just as mathematicians, psychologists, and lawyers have specialized terms they use, economics also has its own set of terms and concepts that might seem unfamiliar at first. University Of San Carlos WHY ECONOMISTS DISAGREE This disagreement can be attributed to two primary reasons: 01 DIFFERENCES IN SCIENTIFIC JUDGMENTS 02 DIFFERENCES IN VALUES University Of San Carlos WHY ECONOMISTS DISAGREE This disagreement can be attributed to two primary reasons: DIFFERENCES IN SCIENTIFIC JUDGMENTS Economists may have differing beliefs about how the world works based on their interpretation of data, models, and theories. They might dispute the validity of certain economic theories or disagree on the assumptions underlying their models. These scientific disagreements can lead to different conclusions about the effectiveness of policies. DIFFERENCES IN SCIENTIFIC JUDGMENTS Beyond scientific disagreements, economists also bring their own values and beliefs about what economic policy should achieve. This is where normative economics comes into play, as it involves subjective judgments about what is desirable or fair. University Of San Carlos PERCEPTION VERSUS REALITY Addresses the common misconception about the extent of disagreement among economists. It explores how the differences in scientific judgments and differences in values contribute to the perception of widespread disagreement among economists, even though there is significant consensus on many core issues. University Of San Carlos  University of San Carlos THANKYOU! CHAPTER 2 | GROUP 1 September 24, 2024 ALIVIO, GELLIAN MARIAH ASHLEY G. AMATIAGA, MA. THERESA N. ANTIPASADO, NICK ANTHONY P. BALANZAR, RAYA FRANCESCA L.