Lecture 1 Thinking like an Economist PDF

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Written notes, diagrams, formulas, and terms for principles of Macroeconomics. Detailed explanations based on book and lecture notes used to study for the exams. ...

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What ar aree economists’ two rroles? oles? How do the theyy differ? ● Scientists: Try to explain the world ○ Employ the scientific method by dispassionately developing and testing of theories about how the world works ○ Make assumptions: to simplify the world ○ Policy Advisors: try to improve the world What ar aree models? How do economists use them? ● Use models to study economic issues: highly simplified representations of the issues What are are the elements of the Circular Circular Flow Flow Diagram? What concepts does the diagram diagram illustrate? ● Visual model of the economy ● Shows how dollars flow through markets among households and firms ● Two decision makers: ○ Firms: buy/hire factors of production and use them to produce/sell goods and services ○ Households: own the factors of production, own capital or land and rent it to firms, buy and consume goods and services based on the money they earn selling factors of production

○ Green is dollars flowing, red is goods, services, land, and work ○ Arrow is not GDP for micro ○ Households provide work or land and receive money, firms use the work or the land to produce something and sell it back to the households

How is the Production Possibilities Frontier related to Opp Cost? ● Graph that shows combinations of output that the economy can possibly produce given available factors of production and technology

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Slope represents Opp cost On frontier is: efficient allocation Beyond Frontier: impossible, need more labor hours Moving along the PPF: ■ Illustrates Opp Cost ■ Tradeoff between what you’re creating ■ The slope is the cost of one good in terms of the other ■ Measure: 1 unit increase of wheat is # of computers you have to replace ■ Slope: 5,000 to 4000 units wheat = -1000 which increases 100 computers ■ Steeper is higher opp cost in terms of x axis label ■ Allocation of resources change along the line ○ Economic growth shifts out the PPF as standard of living improves we can produce and consume more ○ PPF is bowed outward when:

■ Workers have different skills Difference between Micro and Macro? Diff between Positive and Normative Statements? ● Micro: study of individual firms and households ● Macro: study of economy wide phenomena, including inflation, unemployment, and economic growth ● Positive: descriptive, explains how we describe the world: observation ● Normative: defines how the world should be:...