THE ECONOMIST AS A SCIENTIST The economic way of thinking . . .
Think in terms of alternatives.
Evaluate the cost of individual and social choices. Examine and understand how certain events and issues are related.
Involves thinking analytically and objectively.
Makes use of the scientific method.
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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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Copyright 2004 South-Western/Thomson Learning
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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Economic Models
Our First Model: The Circular-Flow Diagram
Economists use models to simplify reality in
order to improve our understanding of the world Two of the most basic economic models include:
The circular-flow diagram is a visual model of the
economy that shows how dollars flow through markets among households and firms.
The Circular Flow Diagram
The Production Possibilities Frontier
Copyright 2004 South-Western/Thomson Learning
Copyright 2004 South-Western/Thomson Learning
Figure 1 The Circular Flow
Our First Model: The Circular-Flow Diagram
Revenue Goods and services sold
MARKETS FOR GOODS AND SERVICES Firms sell Households buy
Wages, rent, and profit
Produce and sell goods and services
Hire and use factors of production
HOUSEHOLDS Buy B and d consume goods and services Own and sell factors of production
FIRMS Produce P d and d sellll goods and services Hire and use factors of production
Factors of production
Firms
Spending Goods and services bought
MARKETS FOR FACTORS OF PRODUCTION Households sell Firms buy
Households Buy and consume goods and services Own and sell factors of production
Labor, land, and capital Income = Flow of inputs and outputs = Flow of dollars
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Copyright 2004 South-Western
Our First Model: The Circular-Flow Diagram
Our First Model: The Circular-Flow Diagram
Markets for Goods and Services
Factors of Production
Firms sell Households buy
Inputs used to produce goods and services
Land, labor, and capital
Markets for Factors of Production
Households sell Firms buy
Copyright 2004 South-Western/Thomson Learning
Copyright 2004 South-Western/Thomson Learning
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 pproduction and the available production technology.
Figure 2 The Production Possibilities Frontier
Quantity of Computers Produced
3,000
D C
2,200 2,000
A Production possibilities frontier
1,000
300
600 700
1,000
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Our Second Model: The Production
Possibilities Frontier Concepts Illustrated by the Production Possibilities Frontier
Summary Economists try to address their subjects with a scientists 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.
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Summary
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Summary
Economics is divided into two subfields:
Microeconomists study decisionmaking by households and firms in the marketplace. Macroeconomists study the forces and trends that affect the economy as a whole
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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.
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Summary 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.
