In this chapter you will: See how economists apply the methods of science, consider how assumptions and models can shed light on the world, learn two simple models - the circular flow and the production possibilities frontier, distinguish between microeconomics and macroeconomics,...
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2
2
Thinking Like an
Economist
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Thinking Like an Economist
deadweight loss
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Thinking Like an Economist
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The Scientific Method: Observation, Theory,
and More Observation
• Uses abstract models to help explain how a
complex, real world operates
• Develops theories, collects, and analyzes data
to evaluate the theories
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The Role of Assumptions
• Economists make assumptions in order to
make the world easier to understand
• The art in scientific thinking is deciding which assumptions to make
• Economists use different assumptions to
answer different questions
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Our First Model: The Circular-Flow Diagram
• The circularflow diagram is a visual model of the economy that shows how dollars flow through
markets among households and firms
Trang 9Figure 1 The Circular Flow
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Spending
Goods and services bought
Revenue
Goods and services sold
Labor, land, and capital Income
= Flow of inputs and outputs = Flow of dollars
Factors of production
Wages, rent, and profit
•Households sell
•Firms buy
MARKETS FOR FACTORS OF PRODUCTION
•Firms sell
•Households buy
MARKETS FOR GOODS AND SERVICES
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Our First Model: The Circular-Flow Diagram
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Our First Model: The Circular-Flow Diagram
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Our First Model: The Circular-Flow Diagram
• Factors of Production
• Inputs used to produce goods and services
• Land, labor, and capital
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Our Second Model: The Production
Trang 14Figure 2 The Production Possibilities Frontier
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Production possibilities frontier
A
B
C
Quantity of Cars Produced
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Our Second Model: The Production
Trang 16Figure 3 A Shift in the Production Possibilities Frontier
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E
Quantity of Cars Produced
2,000
700
2,100
750 0
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Microeconomics and Macroeconomics
of the economy
• How households and firms make decisions and how they interact in specific markets
whole
• Economywide phenomena, including inflation,
unemployment, and economic growth
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THE ECONOMIST AS POLICY
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POSITIVE VERSUS NORMATIVE
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• Positive or Normative Statements?
• The income gains from a higher minimum wage are worth more than any slight reductions in
employment.
NORMATIVE
• State governments should be allowed to collect
from tobacco companies the costs of treating smokingrelated illnesses among the poor.
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WHY ECONOMISTS DISAGREE
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Economists Agree
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