Thinking Like an Economist


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Introduction

In this chapter, we'll be discussing about the ways in which economists view the world. Just like science, economics demand observation and theory.
What do you think it means to think like an economist?

What We Will Learn
-The difference between micro and macro economics
-Flow of dollars among households and firms through circular flow diagram
-Various combination of outputs through production possibilities frontier




Key Terms
-Circular Flow Diagram: A model of market economy that shows the flow of dollars between households and firms
-Production Possibilities Frontier: A graph that shows the various combinations of output that the economy can produce at maximum given the limited factors of production and the available technology
-Microeconomics: Study of how households and firms make decisions and interactions in markets
-Macroeconomics: Study of economy-wide phenomena. ex) inflation, unemployment, and economic growth
-Positive Statements: Descriptive claims that describe the world as it is
-Normative Statements: Prescriptive statements that explain how the world ought to be



Topics

Overview Podcast!!:


1) Assumptions & Economic Models
-Circular Flow Diagram
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The circular-flow diagram refers to a visual model of the economy that shows how dollars flow through two markets: the market for goods and services, and the market for factors of production. Two types of decision makers comprise these markets: households and firms. Firms are sellers in the market for goods and services and buyers in the market for factors of production. Households are buyers in the market for goods and services and sellers in the market for factors of production.
The inner loop represents the flow of inputs and outputs between households and firms, and the outer loop represents the flow of dollars between households and firms.

-The Production Possibilities Frontier (PPF)
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The PPF graph shows the combinations of output that the economy can possibly produce given the available factors of production and the available production technology.
Suppose that a store is producing two types of goods, books and bread. If all resources of the store were devoted to producing books, the economy would produce 2,000 books and zero bread. If all resources were devoted to producing bread, the economy would produce 4,000 loaves of bread and zero books.
But, more likely, the resources will be divided between the two industries.
The curve on PPF graph represents the idea that if the economy chooses to produce more of one good, then the economy simultaneously chooses to produce less of the other good.

2) Micro & Macro Economics
Microeconomics focuses on the study of how households and firms make decisions and interactions in markets. Ex) effects of rent control on housing in New York City, the impact of foreign competition on the US auto industry, or the effectss of compulsory school attendance on workers' earnings

Macroeconomics focuses on the study of economy-wide phenomena. ex) inflation, unemployment, and economic growth. Ex) effects of borrowing by the federal government, the changes over time in the economy's rate of unemployment, or alternative policies to raise growth in national living standards

3) Positive vs. Normative Analysis
-Positive Statements are descriptive claims that describe the world as it is.
-Normative Statements are prescriptive statements that explain how the world ought to be.

For example, when two people are discussing minimum wage laws, hear are two statements you might hear:
Positive- Minimum wage laws cause unemployment.
Normative- The government should raise the minimum wage.





Quiz

If a motorist is stranded in front of a pay phone and has only dollar bills, and he ends up buying a quarter from a passerby for $1:

-both parties have gained from this exchange.

When private ownership rights are well-defined and enforced, owners:
-can be held accountable for damage to others through misuse of their property.



Conclusion
-The field of economics is divided into two subfields: micro and macro economics. It's important to note the difference and understand that microeconomics focus on the decisions made by households and firms and the interaction among households and firms in the marketplace. Make sure you know the PPF graph and the circular flow diagram.





Sources

http://opinionjournal.com/extra/5204sam.jpg
http://cdis.missouri.edu/exec/data/courses/2305/public/lesson01/Lesson-1-Experiment.jpg