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.