TK

CH+2+Thinking+Like+an+Economist+-+PPC

Overview

  • Focus on the principles outlined in Mankiw's "Microeconomics" regarding economic concepts and models.

Economists' Roles

  • Economists serve as:

    • Scientists: Explain the world using the scientific method.

    • Policy Advisors: Offer guidance on improving economic conditions.

Economic Models

  • Definition: Simplified representations of complex economic realities.

  • Purpose: Help economists study economic issues through manageable assumptions.

    • Example: Simplifying international trade to two countries and two goods.

The Circular-Flow Diagram

  • Description: Visual model showing the flow of dollars and economic interactions between households and firms.

    • Actors:

      • Households

      • Firms

    • Markets:

      • Goods and Services Market

      • Factors of Production Market

Factors of Production

  • Includes:

    • Labor

    • Land

    • Capital (buildings and machinery)

Production Possibilities Frontier (PPF)

  • Definition: Graph illustrating possible combinations of two goods an economy can produce given resources and technology.

    • Example Components:

      • Goods: Computers and Wheat

      • Labor hours required for production.

  • Characteristics:

    • Points on the PPF indicate efficient production.

    • Points inside the PPF indicate underutilization of resources.

    • Points above the PPF are unattainable with current resources.

  • Opportunity Cost: The trade-off involved in reallocating resources from one good to another, illustrated by the PPF slope.

Microeconomics vs Macroeconomics

  • Microeconomics: Focuses on households and firms.

  • Macroeconomics: Concerns economy-wide phenomena like inflation and growth.

Positive vs Normative Economics

  • Positive Statements: Descriptive; can be tested and validated (e.g., "Prices rise when government increases money supply").

  • Normative Statements: Prescriptive; based on values (e.g., "Government should print less money").

Economic Disagreement

  • Economists may disagree due to differing theoretical approaches or values.

  • Most economists converge on certain propositions (e.g., effects of rent control, trade policies).

Summary

  • Economists use models to explain and improve the economy, with microeconomics examining individual behaviors and macroeconomics focusing on the larger economic picture.