WEEK 1 - Chapter 2: Thinking Like An Economist Flashcards
Economic Models.
Economists also use models to learn about the world, but instead of being made of plastic, their models mostly consist of diagrams and equations.
Like a biology teacher’s plastic model, economic models omit many details to allow us to see what is truly important. Just as the biology teacher’s model does not include all of the body’s muscles and capillaries, an economist’s model does not include every feature of the economy.
What are examples of models?
. The circular flow diagram
. The production possibilities frontier
What is a circular-flow diagram?
A visual model of the economy that shows how dollars flow through markets among households and firms.
The diagram on page 25 shows the economy has two types of decision makers–households and firms.
Firms produce goods and services using various inputs, such as labour, land and capital (buildings and machines). These inputs are called the factors of production. Households own the factors of production and consume all the goods and services that the firms produce.
The diagram has flows of goods and services as well as flows of cash.
What is the production possibilities frontier?
A graph that shows the various combinations of output that the economy can possibly produce given the available factors of production and the available production technology.
Outside PPF - Because resources are scarce, not every conceivable outcome is feasible. For example, no matter how resources are allocated between the two industries, the economy cannot produce the amount of cars and computers represented by point D (beyond production possibilities frontier).
On PPF - An outcome is said to be efficient if the economy is getting all it can from the scarce resources it has available. Points on (rather than inside) the production possibilities frontier represent efficient levels of production.
Inside PPF - inefficient
A technological advance in the computer industry shifts the production possibilities frontier outwards, increasing the number of cars and computers the economy can produce.
What does the PPF simplify?
The production possibilities frontier simplifies a complex economy to highlight some basic but powerful ideas: scarcity, efficiency, trade-offs, opportunity cost and economic growth. As you
What is microeconomics?
The study of how households and firms make decisions and how they interact in markets.
What is macroeconomics?
The study of economy- wide phenomena, including inflation, unemployment and economic growth.
Microeconomics and macroeconomics relationship.
Microeconomics and macroeconomics are closely intertwined.
Because changes in the overall economy arise from the decisions of millions of individuals, it is impossible to understand macroeconomic developments without considering the associated microeconomic decisions.
For example, a macroeconomist might study the effect of a cut in income tax on the overall production of goods and services. To analyse this issue, the macroeconomist must consider how the tax cut affects households’ decisions about how much to spend on goods and services.
Despite the inherent link between microeconomics and macroeconomics, the two fields are distinct.
Because microeconomics and macroeconomics tackle different questions, each field has its own set of models, which are often taught in separate course
What are positive statements?
Positive statements are descriptive. They make a claim about how the world is.
What are normative statements?
A second type of statement, such as Norma’s, is normative. Normative statements are prescriptive. They make a claim about how the world ought to be.
Positive and Normative Statements.
Polly: Minimum-wage laws cause unemployment.
Norma: The government should raise the minimum wage.
A key difference between positive and normative statements is how we judge their validity.
We can, in principle, confirm or refute positive statements by examining evidence.
In contrast, evaluating normative statements involves values as well as facts.
Economists in government (part 1).
Former US President Harry Truman once said that he wanted to find a one-armed economist. When he asked his economists for advice, they always answered, ‘On the one hand, … On the other hand, …’
Truman was right in realising that economists’ advice is not always straightforward. This tendency is rooted in one of the Ten Lessons from Economics in chapter 1 – people face trade-offs.
Economists are aware that trade-offs are involved in most policy decisions. A policy might increase efficiency at the cost of equity. It might help future generations but hurt current generations. An economist who says that all policy decisions are easy or clear-cut is an economist not to be trusted.
Economists in government (part 2).
Nonetheless, economists play an important role in many areas of governmental decision making. In Australia, economists work in the Treasury and the Department of Finance to provide advice on taxation and fiscal policy. They give the government advice on microeconomic reform through research conducted at the Productivity Commission.
Economists help construct statistical information at the Australian Bureau of Statistics (ABS) and assess competition policy issues at the Australian Competition and Consumer Commission (ACCC).
Economists skilled in macroeconomic, monetary and financial issues are employed at all levels of the Reserve Bank. Table 2.1 lists the websites of some of these agencies.
Why do economists disagree?
. Economists may disagree about the validity of alternative positive theories about how the world works.
. Economists may have different values and, therefore, different normative views about what policies should try to accomplish.
Slope of a line.
The slope of a line is the ratio of the vertical distance covered to the horizontal distance covered as we move along the line. This definition is usually written out in mathematical symbols as follows:
Slope = 🔺y ➗🔺x = 1st y coordinate - 2nd y coordinate ➗1st x coordinate - 2nd x coordinate
where the Greek letter🔺(delta) stands for the change in a variable. In other words, the slope of a line is equal to the ‘rise’ (change in y) divided by the ‘run’ (change in x).
The slope will be a small positive number for a fairly flat upward-sloping line, a large positive number for a steep upward- sloping line, and a negative number for a downward-sloping line. A horizontal line has a slope of 0.
