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  1. 1. Thinking Like an Economist
  2. 2. GOALS <ul><li>See how economists apply the method of science </li></ul><ul><li>Consider how assumptions and models can shed light on the world </li></ul><ul><li>Learn two simple models the circular-flow diagram and the production possibilities frontier </li></ul><ul><li>Distinguish between microeconomics and macroeconomics </li></ul><ul><li>Learn the difference between positive and normative statements </li></ul><ul><li>Examine the role of economists in making policy </li></ul><ul><li>Consider why economists sometimes disagree with on another </li></ul>
  3. 3. The Economists as Scientists <ul><li>While economists don’t use test tubes or telescopes, they are scientists because they employ the scientific method-the dispassionate and objective development and testing of theories. </li></ul>
  4. 4. The Scientific Method: Observation, Theory, and More Observation <ul><li>Just as in other sciences, an economist observes an event, develops a theory, and collects data to test the theory. An economist observes inflation, creates a theory that excessive growth in money causes inflation, and then collects data on money growth and inflation to see if there is a relationship. </li></ul>
  5. 5. The Role of Assumptions <ul><li>A physicist assumes an object is falling in a vacuum when measuring acceleration due to gravity. An economist may assume that prices are fixed or may assume that prices are flexible.The art of scientific thinking is deciding which assumptions to take. </li></ul>
  6. 6. Economic Models <ul><li>Economists use economic models that are composed of diagrams and equations. Economic models are based on assumptions and are simplifications of economic reality. </li></ul>
  7. 7. The Circular Flow Diagram <ul><li>The circular flow diagram shows the flow of goods and services, factors of production, and monetary payments between households and firms. </li></ul>
  9. 9. The Production Possibilities Frontier <ul><li>A productions possibilities frontier is a graph that shows the combinations of output the economy can possibly produce given the available factors of production and the available productions technology. </li></ul>
  10. 10. DOUBLE CLICK!
  11. 11. Production Possibilities Frontier <ul><li>Production is efficient at points on the curve. This implies that the economy is getting all it can from the scarce resources it has available. </li></ul><ul><li>Production at a point inside the curve is inefficient . </li></ul><ul><li>Production at a point outside of the curve is not possible given the economy’s current level of resources and technology. </li></ul><ul><li>The production possibilities frontier is bowed outward because the opportunity cost of producing more of a good increases as we near maximum production of that good. </li></ul>
  12. 12. Microeconomics & Microeconomics <ul><li>Microeconomics is the study of how households and firms make decisions and how they interact in specific markets. </li></ul><ul><li>Macroeconomics is the study of economy wide phenomena such as the federal deficit, the rate of unemployment, and policies to improve our standard of living. </li></ul><ul><li>Microeconomics and Macroeconomics are related because changes in the overall economy arise from decisions of millions of individuals. </li></ul>
  13. 13. The Economists as Policy Advisor <ul><li>When economists attempt to improve the world, they act as policy advisors. </li></ul><ul><li>Positive statements describe the world as it its. They can be confirmed or refuted with evidence. </li></ul><ul><li>Normative statements prescribe how the world ought to be. They involve values (ethics, religion) as well as facts. </li></ul><ul><li>Economists act as policy advisors to the government in many different areas. Congress is advised by economists. </li></ul>
  14. 14. Why Economists Disagree <ul><li>Differences in scientific judgments: Economists often disagree about the validity of alternative theories or about the size of the effects of changes in the economy on the behavior of households and firms. </li></ul><ul><li>Differences in values (Different normative views) </li></ul><ul><li>In reality, although there are legitimate disagreements among economists on many issues, there is tremendous agreement on basic principles of economics. </li></ul>
  15. 15. Summary <ul><li>Economists also use the scientific method. </li></ul><ul><li>There are two major economic models: The circular flow diagram and the production possibilities frontier. </li></ul><ul><li>The circular flow diagram shows the economic interaction between households and firms. </li></ul><ul><li>The PPF is a graph that shows the different quantities of two goods that an economy (or agent) could efficiently produce with limited productive resources. </li></ul><ul><li>Economists often contribute to the society as policy advisors. </li></ul><ul><li>Economists disagree because of differences in scientific judgments and values. </li></ul>
  16. 16. REVIEW QUESTIONS (True & False) <ul><li>Economic models must mirror reality or they are of no value. </li></ul><ul><li>Normative statements can be refuted with evidence. </li></ul><ul><li>Macroeconomics is concerned with the study of how households and firms make decisions and how they interact in specific markets. </li></ul><ul><li>The production possibilities frontier is bowed outward because the trade-off between the production of any two goods is constant. </li></ul>(F) (F) (F) (F)
  17. 17. Works Cited <ul><li>Mankiw, Gregory N. Study Guide for Mankiw's Principles of Microeconomics. Comp. David R. Hakes. 4th ed. Mason, OH: Thomson South-Western, 2007. </li></ul>