Summery Notes Chapter 2- Thinking Like An Economist PDF

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Microeconomics - ECON-1000-RLG...

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Chapter 2- Thinking Like An Economist Learning Outcomes: 1. Discuss the role of economics as a social science and in the context of the Canadian economy. 2. Explore online research sources that are important to the preservation and dissemination of microeconomic data. 3. Present microeconomic data and relationships using graphs, diagrams, spreadsheets, and numerical exercises. Note: These outcomes are related to the overall course and we will continue to learn and explore these outcomes throughout the course. I wrote them here as we will be looking at the role of economics and also at some of the general online resources as well as the use of graphs etc. Objectives:  Economists as scientists (How economists apply methods of science)  The role of assumptions and economic models  Two basic economic models  Microeconomics and Macroeconomics  Positive Vs. Normative Statements  Basics of Graphing- An Overview Economists as Scientists  The scientific method: observation, theory and more observation.  Observations helps develop a theory; data can be collected and analyzed to evaluate theories.  It is more difficult in economics because economists can not generate their own data.  Hence, economists pay attention to natural experiments. The role of assumptions  Assumptions can simplify the complex world and make it easier to understand.  For example, it is helpful to assume that there are only 2 countries producing only two goods when discussing international trade. Once we understand how trade will work between these two countries, we can extend the analysis to more goods and more countries. Economic Models  Economists use models to explain the world around us. Take an example of a road map.  Most models in economics are composed of diagrams and equations.  The goal is to simplify the reality to increase our understanding; assumptions help us doing that. Two models are particularly useful in Economics: 1. The Circular Flow Diagram- A visual model of the economy that shows how dollars flow through market among households and firms. [Please refer to Figure 2.1 in the Textbook.] a. Two decision makers: Households and Firms b. Two markets: Goods market and Factros market c. Firms are seller in goods market and buyers and factors market d. Households are buyers in goods market and sellers in factors market 1

e. Inner loop shows flow of inputs and outputs while outer loop shows the flow of dollars. 2. The Production Possibilities Frontier- A graph that shows the combinations of output that an economy can possibly produce given the available factors of production and the available production technology. Example: A country that produces two goods: cars and computers a. If all resources are devoted to producing cars, 1000 cars and zero computers can be produced. b. If all resources are devoted to producing computers, 3000 computers and zero cars. c. If resources are divided between two industries, all the feasible combinations are shown on the PPF. [Figure 2.2 in the Textbook] d. On PPF, production is efficient; economy is getting all it can from available resources. e. Production is inefficient inside the curve. f. Outside the PPF, production is not possible given the avaiable resoruces. g. PPF reveals Principle #1, people face tradeoffs and Principle # 2, cost of something is what you give up to get it. (opportunity cost) h. The shape of PPF indicates that the opporunity cost of cars (X-axis) in terms of computers (Y-axis) increases as the country produces more cars and fewer computers because some resources are better suited for one industry than the other. i. If available resources increase, or technology changes, PPF shifts. Microeconomics and Macroeconomics Microeconomics- The study of how households and firms make decisions and how they interact in markets. The impact of foreign competition on the Canadian auto industry, or the effects of compulsory school attendance on workers’ earnings. Macroeconomics- The study of economy-wide phenomena, including inflation, unemployment and economic growth. The changes over time in the economy’s rate of unemployment,. Positive Vs. Normative For example two people are discussing minimum wage laws and you hear two statements: Poly: Minimum-wage laws cause unemployment Norma: The government should raise the minimum wage Ignore whether you agree or disagree with these statements, Poly’s statement describes the real world. (Positive). Norma’s statement is attempting at how the world should be. (Normative) Positive statements can be evaluated using data, while normative involves personal view points. Graphing- Overview  Graphs visually express ideas that might be less clear if described with equations or words.  In the analysis of Economic data, graphs are used to see a relation among different variables.  Single variable graphs (pie, bar, time series)  Two variables graph’s example is (demand curve); Holding all other variables constant.  Variable that is not on either of the axis causes a shift of the curve.  Slope= Change in Y/Change in X or ΔY/ΔX. Slope is the ratio of the vertical distance covered to the horizontal distance covered as we move along the line (rise over run).

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