Chapter+2+Hanna+K

 



=ART ON ECON = 



**Can you say economics is a branch of science?**


  What do you think of when someone says the word “science?” Do you think of the frightening dissection lab you did yesterday? Do you perhaps think of the AP Biology test that’s slowly approaching? Even though science is a subject we usually relate dissection,lab with, today in chapter 2 we are going to explore the similarities between science and economics by analyzing its common characteristics by different themes.

= =

 OBJECTIVITY Ever head of the word “scientific method?” Scientific method is considered the essence of science in which scientist dispassionately test and analyze about how the world works. This scientific method is widely used in economics as well. Without a “dispassionate” testing, in other words objective testing, a result of an experiment cannot be reliable. Therefore, economists try to keep themselves objective when analyzing the failures and successes of the modern day economic systems.

BUILDING MODELS Just like how physicists draw velocity diagrams, economists also build different models to describe various concepts of economy. These diagrams often omit details for appropriate assumptions and simplification. Nonetheless, diagrams greatly aid in understanding the theoretical concepts of microeconomics.

MODEL 1: Circular Flow Diagram

Circular diagram is a visual representation of how economy is organized. First, circular diagram assumes the two decision makers of economy are the firms and households. Firms and Houses switch their buyer and seller role depending on the market they are in. When they are in the markets for the factors of production where labor, land, capital is exchanged, firms are buyers while households are sellers. When they are in the markets for good and services, firms are the sellers and households are the buyers. The outer set of arrows shows the flow of dollars and the inner shows the flow of input and output.



MODEL 2: PRODUCTION POSSIBILITY FRONTIER media type="youtube" key="weYfS8lHPvg" height="340" width="560"

Production possibility frontier is a graph that shows the combination of output that the economy can produce with the factors and technology that is available. Depending on the position of the coordinate, one can make different conclusions.

If the point is on the curve, the outcome is said to be efficient. It is using all of its resources in making a certain product.

Conversely, if the point is inside the curve, the outcome is inefficient. It is not fully using its resource to make its product. If the point is outside the curve, can you guess what happens? Well, if the point is outside the curve, it means the outcome is IMPOSSIBLE: you just don’t have the ability and resources to produce that amount. However, you can extend your production possibility frontier to the point through means such as improving your productivity through technology.

The most important concept that the production possibility curve demonstrates to us is OPPORTUNITY COST and therefore TRADE OFF. Let’s for example that KINGDOM A has an option of producing ice cream or cotton candy as shown in the graph below. In order to produce one more unit of ice cream, certain amount of cotton candy has to be given up. This is because resources are scarce and it has to be allocated depending on our decisions. In this case, the amount of cotton candies given up was the opportunity cost of producing one more unit of ice cream.

FIELDS Biology, Chemistry, Physics--these are some of many fields that science has. Economics also have fields: microeconomics and macroeconomics.

Microeconomics as its name implies explore the smaller picture of economy. It studies the interaction between households and firms and explore their decision making process. Macroeconomics on the other hand studies big picture phenomenon such as inflation, economic growth and unemployment.

DIFFERENT OPINIONS Due to different values people prioritize, economic policy-makers often conflict in different opinions. While policy makers value equity over efficiency, they would push for a fair policy that equally gives opportunities to everyone. If a policy maker value efficiency, they would push for a policy that can make most products regardless of its fairness.

POSITIVE VS NORMATIVE STATEMENT Positive statement is an assertion about how the world is. It’s a statement of factual observation. Normative statement,in the other hand, is an assertion about the world should be. When making a positive statement, economists act more as scientist. When making normative statement, scientist are acting more as policy maker.

EXAMPLES? :D

Positive statement: Staying up all night is not healthy.

Normative Statement: Schools should decrease the amount of test to allow students to sleep early.

**1.**

Which of the following is FALSE, regarding economics as a science?    <span style="font-family: Verdana,Geneva,sans-serif;"> 2. All of the following are characteristics of the Circular Flow Model of the economy, EXCEPT: <span style="font-family: Verdana,Geneva,sans-serif;"> <span style="font-family: Verdana,Geneva,sans-serif;"> <span style="font-family: Verdana,Geneva,sans-serif;"> <span style="font-family: Verdana,Geneva,sans-serif;"> 3. Which of the following is an example of a normative statement? <span style="font-family: Verdana,Geneva,sans-serif;"> <span style="font-family: Verdana,Geneva,sans-serif;"> <span style="font-family: Verdana,Geneva,sans-serif;"> <span style="font-family: Verdana,Geneva,sans-serif;">
 * <span style="font-family: Verdana,Geneva,sans-serif;"> || <span style="font-family: Verdana,Geneva,sans-serif;">a. || <span style="font-family: Verdana,Geneva,sans-serif;"> Economic knowledge is obtained through the scientific method, just as in any other science. ||
 * <span style="font-family: Verdana,Geneva,sans-serif;"> || <span style="font-family: Verdana,Geneva,sans-serif;">b. || <span style="font-family: Verdana,Geneva,sans-serif;"> It is difficult to conduct experiments in economic matters. ||
 * <span style="font-family: Verdana,Geneva,sans-serif;"> || <span style="font-family: Verdana,Geneva,sans-serif;">c. || <span style="font-family: Verdana,Geneva,sans-serif;"> Economists pay close attention to natural experiments resulting from historical events. ||
 * <span style="font-family: Verdana,Geneva,sans-serif;"> || <span style="font-family: Verdana,Geneva,sans-serif;">d. || <span style="font-family: Verdana,Geneva,sans-serif;"> Economic theories represent irrefutable facts. ||
 * <span style="font-family: Verdana,Geneva,sans-serif;"> || <span style="font-family: Verdana,Geneva,sans-serif;"> || <span style="font-family: Verdana,Geneva,sans-serif;">a. || <span style="font-family: Verdana,Geneva,sans-serif;"> the model has two markets: one for goods and services and one for factors of production. ||
 * <span style="font-family: Verdana,Geneva,sans-serif;"> || <span style="font-family: Verdana,Geneva,sans-serif;">b. || <span style="font-family: Verdana,Geneva,sans-serif;"> the model includes two sectors: the Firms sector and the Households sector. ||
 * <span style="font-family: Verdana,Geneva,sans-serif;"> || <span style="font-family: Verdana,Geneva,sans-serif;">c. || <span style="font-family: Verdana,Geneva,sans-serif;"> the model describes two circular flows: one for inputs and one for resources. ||
 * <span style="font-family: Verdana,Geneva,sans-serif;"> || <span style="font-family: Verdana,Geneva,sans-serif;">d. || <span style="font-family: Verdana,Geneva,sans-serif;"> the two flows described by the model move in opposite directions. || <span style="font-family: Verdana,Geneva,sans-serif;"> || <span style="font-family: Verdana,Geneva,sans-serif;"> ||
 * <span style="font-family: Verdana,Geneva,sans-serif;"> || <span style="font-family: Verdana,Geneva,sans-serif;">a. || <span style="font-family: Verdana,Geneva,sans-serif;"> Higher interest rates will cause people to borrow and invest less. ||
 * <span style="font-family: Verdana,Geneva,sans-serif;"> || <span style="font-family: Verdana,Geneva,sans-serif;">b. || <span style="font-family: Verdana,Geneva,sans-serif;"> The government should increase spending during recessions, so that the economy recovers quickly. ||
 * <span style="font-family: Verdana,Geneva,sans-serif;"> || <span style="font-family: Verdana,Geneva,sans-serif;">c. || <span style="font-family: Verdana,Geneva,sans-serif;"> When the price of a good increases, consumers respond by reducing the quantity that they want to purchase of the good. ||
 * <span style="font-family: Verdana,Geneva,sans-serif;"> || <span style="font-family: Verdana,Geneva,sans-serif;">d. || <span style="font-family: Verdana,Geneva,sans-serif;"> Over the past 50 years, the number of women that participate in the labor force has increased dramatically. ||

=<span style="font-family: Verdana,Geneva,sans-serif;"> = <span style="font-family: Verdana,Geneva,sans-serif;">
 * <span style="font-family: Verdana,Geneva,sans-serif;">circular-flow diagram || <span style="font-family: Verdana,Geneva,sans-serif;">a visual model of the economy that shows how dollars flow through markets among households and firms ||
 * <span style="font-family: Verdana,Geneva,sans-serif;">macroeconomics || <span style="font-family: Verdana,Geneva,sans-serif;">the study of economy wide phenomena, including inflation, unemployment, and economic growth ||
 * <span style="font-family: Verdana,Geneva,sans-serif;">microeconomics || <span style="font-family: Verdana,Geneva,sans-serif;">the study of how households and firms make decisions and how they interact in markets ||
 * <span style="font-family: Verdana,Geneva,sans-serif;">normative statements || <span style="font-family: Verdana,Geneva,sans-serif;">claims that attempt to prescribe how the world should be ||
 * <span style="font-family: Verdana,Geneva,sans-serif;">positive statements || <span style="font-family: Verdana,Geneva,sans-serif;">claims that attempt to describe the world as it is ||
 * <span style="font-family: Verdana,Geneva,sans-serif;">production possibilities frontier || <span style="font-family: Verdana,Geneva,sans-serif;">a graph that shows the combinations of output that the economy can possibly produce given the available factors of production and the available production technology ||