Chapter+2+Thinking+Like+an+Economist+(Joon,+Scott,+and+Steven)

= Thinking Like an Economist = = = = Key Terms =


 * Circular-flow diagram:** a visual model of the economy that shows how dollars flow through markets among households and firms.
 * Production possibilities frontier:** 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.
 * 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.
 * Positive statements:** claims that attempt to describe the world as it is.
 * Normative statements:** claims that attempt to prescribe how the world should be.

= Key Concepts =

The scientific method, observation, and theory seem like what a scientist may do, however economists use the same process. For example if money growth and inflation seemed like they were connected together, economists would develop theories that would support it. However, the downside of using the same method as scientists is that economists cannot use experiments. Experiments would require shifting of an economy to see what effects it would bring out. Obviously, one cannot do this as politicians and the citizens would not allow it.

**The Circular-Flow Diagram**
The diagram may seem a bit confusing at first, however you can see that the economy is split into two groups: households and firms. While the household provides labor, consumers, and money, the firm provides income and goods. For example, take a dollar and apply it to the graph. Imagine someone wanted to buy a good for a dollar. That someone would buy the good which would then transport the dollar to the revenue for the firm. Then the revenue would then be moved to pay the workers which would then start the cycle over again.

The Production Possibilities Frontier
On this graph you can see both x and y axis has a different product. To understand it a bit easier, replace the Products A and B to guns and computers. On the graph, you can see that this economy's resource is specialized in producing guns because point A is the highest. However, when the economy decides to produce computers the number of goods produced decreases to point B. As the economy decides to produce more computers, the quantity of products decreases to point C and will eventually become 0.

There is an exception however. For example, if there was a technology advancement in producing goods, the graph can be shifted upwards. As a result, both products would increase in production.

Positive versus Normative Analysis
While positive statements are descriptive, normative statements are prescriptive. Positive statements say how something is. For example, "minimum wage-laws cause unemployment". Normative statements say how something ought to be. For example, "the government should raise the minimum wage."

Differences in Scientific Judgments
While scientists disagree on if the world is experiencing global warming or not, economists do the same. For example, economists debate on if a government should tax a good or not which would result in totally different outcomes.

Imagine two people named John and Brian are residents in a local community. John receives an income of 50,000 dollars a month while Brian earns 10,000 dollars. Since John has the higher income, John is taxed 5000 dollars with Brian only being taxed 2000 dollars. The percentage being taken away is 10 percent different with John being 10 percent of his income and Brian 20 percent of his income. With difficulties such as this scenario facing the economists, a solution is hard to come by.
 * Difference In Values**

= Conclusion = -Like scientists, economists try to solve problems using hypotheses and theories. -For example the circular-flow diagram and the production possibilities frontiers. -Economics is split into two categories. -Microeconmics studies the interaction between households and firms. -Macroeconmics studies the effects that affect the economy as a whole. -Positive statements talks about how the world is, normative statement talks about how the world ought to be.

= Study Questions = 1. What do scientists do that is similar to what economists do? 2. Can one achieve a point off the production possibilities frontier? Explain. 3. How does a dollar flow constantly in the circular-flow diagram?

Student Made Resource: [|Quizlet Chapter 2] = Sources = http://www.people.eku.edu/ruppelf/Eco230/circularflow.gif http://economics.blog.co.in/files/2008/03/72221.gif