economics

ECONOMICS : 

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Thinking Like an Economist : 

Thinking Like an Economist Every field of study has its own terminology Mathematics integrals ? axioms ? vector spaces Psychology ego ? id ? cognitive dissonance Law promissory ? estoppel ? torts ? venues Economics supply ? opportunity cost ? elasticity ? consumer surplus ? demand ? comparative advantage ? deadweight loss

Thinking Like an Economist : 

Thinking Like an Economist Economics trains you to. . . . To think about how to maximise the wealth of nations Think in terms of alternatives. Evaluate the cost of individual and social choices. Examine and understand how certain events and issues are related.

THE ECONOMIST AS A SCIENTIST : 

THE ECONOMIST AS A SCIENTIST The economic way of thinking . . . Involves thinking analytically and objectively. Makes use of the scientific method. Uses abstract models to help explain how a complex, real world operates. Develops theories, collects and analyzes data to evaluate the theories.

The Scientific Method: Observation, Theory, and More Observation : 

The Scientific Method: Observation, Theory, and More Observation Uses abstract models (law of demand, production law ) to help explain how a complex, real world operates. Develops theories, collects and analyzes data to evaluate the theories.

Slide 6: 

Some standard assumptions: 1. other things remain the same 2. human behaviour will not change etc. 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. The Role of Assumptions

Economic Models : 

Economic Models Economists use models to simplify reality in order to improve our understanding of the world. Two of the most basic economic models are: The Circular Flow Diagram The Production Possibilities Frontier

Our First Model: The Circular-Flow Diagram : 

Our First Model: The Circular-Flow Diagram The circular-flow diagram is a visual model of the economy that shows how dollars flow through markets among households and firms.

Figure 1 The Circular Flow : 

Figure 1 The Circular Flow Spending Revenue Income = Flow of inputs and outputs = Flow of dollars

Our First Model: The Circular-Flow Diagram : 

Our First Model: The Circular-Flow Diagram Firms Produce and sell goods and services Hire and use factors of production Households Buy and consume goods and services Own and sell factors of production

Our First Model: The Circular-Flow Diagram : 

Our First Model: The Circular-Flow Diagram Markets for Goods and Services Firms sell Households buy Markets for Factors of Production Households sell Firms buy

Our First Model: The Circular-Flow Diagram : 

Our First Model: The Circular-Flow Diagram Factors of Production Inputs used to produce goods and services Land, labor, and capital Mostly we use two models: 1. labour (L) 2. Capital (k)

Our Second Model: The Production Possibilities Frontier : 

Our Second Model: The Production Possibilities Frontier The production possibilities frontier is a graph that shows the combinations of output that the economy can possibly produce given the available factors of production and the available production technology.

Figure 2 The Production Possibilities Frontier : 

Figure 2 The Production Possibilities Frontier Quantity of Cars Produced 0 3,000 1,000 Quantity of Computers Produced

Our Second Model: The Production Possibilities Frontier : 

Our Second Model: The Production Possibilities Frontier Concepts illustrated by the production possibilities frontier Efficiency Trade-offs Opportunity cost: the second best alternative use is called opportunity cost (opportunity lost) Economic growth

Figure 3 A Shift in the Production Possibilities Frontier : 

Figure 3 A Shift in the Production Possibilities Frontier Quantity of Cars Produced 0 Quantity of Computers Produced

Microeconomics and Macroeconomics : 

Microeconomics and Macroeconomics Microeconomics focuses on the individual parts of the economy. How households and firms make decisions and how they interact in specific markets Macroeconomics looks at the economy as a whole. Economy-wide phenomena, including inflation, unemployment, and economic growth

THE ECONOMIST AS POLICY ADVISOR : 

THE ECONOMIST AS POLICY ADVISOR When economists are trying to explain the world, they are scientists. When economists are trying to change the world, they are policy advisors.

Positive versus Normative Analysis : 

Positive versus Normative Analysis Positive statements are statements that attempt to describe the world as it is. Called descriptive analysis Normative statements are statements about how the world should be. Called prescriptive analysis

Positive Versus Normative Analysis : 

Positive Versus Normative Analysis Are the following positive or normative statements? An increase in the minimum wage will cause a decrease in employment among the least-skilled. POSITIVE Higher federal budget deficits will cause interest rates to increase. POSITIVE ? ? ? ?

Positive Versus Normative Analysis : 

Positive Versus Normative Analysis Are the following 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 smoking-related illnesses among the poor. NORMATIVE ? ? ?

Economists in Washington : 

Economists in Washington . . . serve as advisers in the policymaking process of the three branches of government: Legislative Executive Judicial

A PARABLE FOR THE MODERN ECONOMY : 

Imagine an economic system with only two goods, potatoes and milk and only two people, a potato farmer and a cattle rearer What should each person produce? Why should these people trade? A PARABLE FOR THE MODERN ECONOMY

Production Possibilities : 

Production Possibilities Suppose the farmer and rearer decide not to engage in trade: Each consumes only what he or she can produce alone. The production possibilities frontier is also the consumption possibilities frontier. Without trade, economic gains are diminished.

Figure 1 The Production Possibilities Frontier : 

Figure 1 The Production Possibilities Frontier Potatoes (ounces) 0 Milk (a) The Farmer ’ s Production Possibilities Frontier Copyright©2003 Southwestern/Thomson Learning

Figure 1 The Production Possibilities Curve : 

Figure 1 The Production Possibilities Curve Copyright©2003 Southwestern/Thomson Learning Potatoes (ounces) 0 Milk (b) The Rancher ’ s Production Possibilities Frontier

Specialization and Trade : 

The farmer should produce potatoes. The rancher should produce meat. Specialization and Trade Suppose instead the farmer and the rancher decide to specialize and trade… Both would be better off if they specialize in producing the product they are more suited to produce, and then trade with each other.

Figure 2 How Trade Expands the Set of Consumption Opportunities : 

Figure 2 How Trade Expands the Set of Consumption Opportunities Copyright©2003 Southwestern/Thomson Learning Potatoes (ounces) 0 Milk (a) The Farmer ’ s Production and Consumption

Figure 2 How Trade Expands the Set of Consumption Opportunities : 

Figure 2 How Trade Expands the Set of Consumption Opportunities Copyright © 2004 South-Western Potatoes (ounces) 0 Meat (ounces) (b) The Rancher ’ s Production and Consumption

COMPARATIVE ADVANTAGE : 

COMPARATIVE ADVANTAGE Differences in the costs of production determine the following: Who should produce what? How much should be traded for each product?

COMPARATIVE ADVANTAGE : 

COMPARATIVE ADVANTAGE Two ways to measure differences in costs of production: The number of hours required to produce a unit of output (for example, one pound of potatoes). The opportunity cost of sacrificing one good for another.

Absolute Advantage : 

Absolute Advantage The comparison among producers of a good according to their productivity. Describes the productivity of one person, firm, or nation compared to that of another. The producer that requires a smaller quantity of inputs to produce a good is said to have an absolute advantage in producing that good.

Absolute Advantage : 

The Rancher has an absolute advantage in the production of both meat and potatoes. Absolute Advantage The Rearer needs only 10 minutes to produce an ounce of potatoes, whereas the Farmer needs 15 minutes. The Rearer needs only 20 minutes to produce an ounce of meat, whereas the Farmer needs 60 minutes.

Opportunity Cost and Comparative Advantage : 

Opportunity Cost and Comparative Advantage Compares producers of a good according to their opportunity cost, that is, what must be given up to obtain some item The producer who has the smaller opportunity cost of producing a good is said to have a comparative advantage in producing that good. Who has the comparative advantage in the production of each good? ? ?

Comparative Advantage and Trade : 

Comparative Advantage and Trade Potato costs… The Rearer’s opportunity cost of an ounce of potatoes is ½ a liter of milk The Farmer’s opportunity cost of an ounce of potatoes is ¼ a liter of milk Meat costs… The Rearer’s opportunity cost of a liter of milk is 2 ounces of potatoes. The Farmer’s opportunity cost of a liter of milk is 4 ounces of potatoes...

Comparative Advantage and Trade : 

Comparative Advantage and Trade …so, the Rearer has a comparative advantage in the production of milk but the Farmer has a comparative advantage in the production of potatoes.

Comparative Advantage and Trade : 

Comparative Advantage and Trade Comparative advantage and differences in opportunity costs are the basis for specialized production and trade. Whenever potential trading parties have differences in opportunity costs, they can each benefit from trade.

Gains from Trade : 

Gains from Trade

Comparative Advantage and Trade : 

Comparative Advantage and Trade Benefits of Trade Trade can benefit everyone in a society because it allows people to specialize in activities in which they have a comparative advantage.

FYI—The Legacy of Adam Smith and David Ricardo : 

FYI—The Legacy of Adam Smith and David Ricardo Adam Smith In his 1776 book An Inquiry into the Nature and Causes of the Wealth of Nations, Adam Smith performed a detailed analysis of trade and economic interdependence, which economists still adhere to today. David Ricardo In his 1816 book Principles of Political Economy and Taxation, David Ricardo developed the principle of comparative advantage as we know it today.

APPLICATIONS OF COMPARATIVE ADVANTAGE : 

APPLICATIONS OF COMPARATIVE ADVANTAGE Should Tiger Woods Mow His Own Lawn? ? ? ? ?

APPLICATIONS OF COMPARATIVE ADVANTAGE : 

APPLICATIONS OF COMPARATIVE ADVANTAGE Should the United States trade with other countries? Each country has many citizens with different interests. International trade can make some individuals worse off, even as it makes the country as a whole better off. Imports—goods produced abroad and sold domestically Exports—goods produced domestically and sold abroad

Slide 44: 

Economists try to address their subjects with a scientist’s objectivity. They make appropriate assumptions and build simplified models in order to understand the world around them. Two simple economic models are the circular-flow diagram and the production possibilities frontier.

Slide 45: 

Economics is divided into two subfields: Microeconomics is the study of decision-making by households and firms in the marketplace. Macroeconomics is the study of the forces and trends that affect the economy as a whole.

Slide 46: 

A positive statement is an assertion about how the world is. A normative statement is an assertion about how the world ought to be. When economists make normative statements, they are acting more as policy advisors than scientists.

Slide 47: 

Economists who advise policymakers offer conflicting advice either because of differences in scientific judgments or because of differences in values. At other times, economists are united in the advice they offer, but policymakers may choose to ignore it.