Principles of Microeconomics & Principles of Macroeconomics: Ch. 2 Second Canadian Edition Chapter 2 Thinking Like an Economist © 2002 by Nelson, a division.

Principles of Microeconomics & Principles of Macroeconomics: Ch. 2 Second Canadian Edition

Chapter 2

Thinking Like an Economist

© 2002 by Nelson, a division of Thomson Canada Limited


Overview

The Economist as a ScientistThe Economist as a Policy-MakerWhere Economists Disagree and

where Economists Agree


Economics trains us to think . . .

… in terms of alternatives.

… and understand the cost of

individual and social choices.

… and provide us with insights into

how certain events and issues are

related.


Thinking Like an Economist

The economic way of thinking requires

one to think analytically and

objectively.

The economic way of thinking is like

the Scientific Method.


The Economic Way of Thinking

The Scientific Method uses abstract models to help understand how a complex real-world operates.

The Scientific Method develops theory, collects and analyzes data to prove the theory.


The Economic Way of Thinking includes. . .

… the development of abstract models from theories and the analysis of the models using two approaches:

–descriptive: reporting facts, etc.

–analytical: abstract reasoning


The Circular-Flow Model

Provides a simple way of describing all the economic transactions that occur in a Market Economy.

Emphasizes decentralization in that economic decisions are made by Households and Businesses in Product and Resource Markets.


Diagram: The Circular-Flow Model

Households Businesses

Resource Markets

Product Markets




Product Markets

Flow ofResources

SupplyResources

DemandResources

Resource Markets




Product Markets

Flow of

SupplyResources

DemandResources

LandLabourCapital

Resource Markets




Product Markets

Flow of Goodsand Services

SupplyGoods &Services

DemandGoods &Services

Resource Markets




Product Markets

The Flow of Dollars

$ Spending$ Revenue

Resource Markets




Product Markets

The Flow of Dollars

$ Revenue

$ Expenses$ Income

$ Spending

Resource Markets




Product Markets

The Flow of Dollars

$ Revenue

$ Expenses$ Income

RentWagesProfit

$ Spending

Resource Markets




Product Markets

$$

$$

Dollar FlowReal Flow

Resource Markets


Microeconomics and Macroeconomics

Microeconomics focuses on “the individual parts of the economy.”– e.g. individual markets

– e.g. price increase in the house marketMacroeconomics looks at the

“economy as a whole.”– e.g. aggregate of markets

– e.g. average price increase for all goods


A Second Economic Model: Production Possibilities Frontier….

… is a graph that shows the various combinations of output that the economy can possibly produce given the available factors of production and technology.


Production Possibilities FrontierC

om

pu

ters

Cars0



om

pu

ters

700

A

Cars0

2000



om

pu

ters

3000

700

A

Cars

E

0

2000



om

pu

ters

3000

1000700

A

Cars

E

F

0

2000



om

pu

ters

3000

1000700

A

Cars

E

F

0

2000


Principles of Economics Illustrated by the Production Possibilities Frontier . . .

EfficiencyTradeoffsOpportunity CostEconomic Growth


Efficient Resource Use


om

pu

ters

3000

1000

2000

700

A

Cars

E

F

0

B?1000

300



om

pu

ters

3000

1000

2000

700

A

Cars

E

F

0

1000

900

C

Tradeoffs



om

pu

ters

3000

1000

2000

700

A

Cars

E

F

0

1000

900

C

Opportunity Cost of next 200 cars is 1000 computers. Opportunity cost of 1 car is 5 computers

OpportunityCost


Economic Growth


om

pu

ters

3000

1000

2000

700Cars

0

1000

300


Quick Quiz! Check It Out!

In what sense is economics like science?

Define: Microeconomics Macroeconomics


Overview




Two Roles of Economists . . .

When they are trying to explain the world,

they are

Scientists.When they are trying

to change the world they are

Policy-makers.


Positive versus Normative Analysis

Positive: Statements or assertions dealing with matters of fact or questions about how things are (descriptive analysis).

Normative: Statements that reflect individual opinions (prescriptive analysis).


Positive or Normative Statements? An increase in the minimum wage will cause a

decrease in employment among the least skilled. Higher federal budget deficits will cause interest

rates to increase. The income gains from a higher minimum wage

are worth more than any slight reduction in employment.

Provincial governments should be allowed to collect from tobacco companies the costs of treating smoking-related illnesses among the poor.


Economists in Government . . . Department of Finance — formulate tax policy. Industry Canada — design competition policy. Foreign Affairs — assist with trade agreements. Human Resources Development Canada —

formulate labour market policies. Bank of Canada — implement monetary policy. Environment Canada — design environment

laws.


Economists in the Private Sector . . . C.D. Howe Institute — suggest policy options. Fraser Institute — suggest policy options. Provide forecasts for companies. Assist firms manage resources efficiently. Assist with investment decisions.


Quick Quiz! Check It Out!

Give an example of a positive statement.

Name three areas of government policy which economists provide advice for.

Identify two ways in which economists assist the private sector.


Overview




Do Economists Always Agree With Each Other? Three reasons why they don’t:

Disagree about the validity of

alternative positive theories

Each have different values, thus

different normative views

Advice of charlatans or cranks

complicates ability to agree


Examples of When Economists (Majority) Do Agree. . .

A ceiling on rents reduces the quantity

and quality of housing available.

Tariffs and import quotas usually

reduce general economic welfare.


Thinking Like an Economist . . .

Economics uses the scientific approach.

Economics is divided into Microeconomics

and Macroeconomics.

Economics is analyzed through both

Positive and Normative statements.


Overview



Principles of Microeconomics & Principles of Macroeconomics: Ch. 2 Second Canadian Edition Chapter 2 Thinking Like an Economist © 2002 by Nelson, a division.

Documents

canadian edition diagram

canadian edition chapter

revenue resource markets

flow of dollars

economic way of thinking

abstract reasoning slide

economic transactions

economic decisions