Thinking Like an Economist

1
Chapter 2

• Thinking Like an Economist

2

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3
Chapter 2 Outline

• Notes on Economics
• Role of Economic Models
• Model I Circular Flow Diagram
• Model II Production Possibilities Frontier
• Concluding Points
• Appendix on Graphs

4
Micro vs Macro

• Microeconomics individual parts of economy.
• Macroeconomics economy as a whole.

5
Thinking Like an Economist

• Econ a Social Science
• Social Sciences
• Scientific Method Explain Predict
• assumptions -hypothesis -test

6
We All Use Theory

• Soda Machine
• Party Lines
• Party Now/Get Up Early Do Paper

7
Do We Buy More when Price is Lower?

• Price Quantity Demand
• June98 1 cone 2,000 cones
• Jan99 0.50 20 cones
• June99 0.50 2,500 cones

8
Circular Flow Model

9
Circular-Flow Diagram.
Product Market
Businesses
Households
Factor Market
10
Circular-Flow Diagram.
Product Market
Businesses
Households
Factor Market
11
The Circular-Flow Diagram.
Product Market
Businesses
Households
Factor Market
12
The Circular-Flow Diagram.
Product Market
Flow of Goods Services
Businesses
Households
Factor Market
13
The Circular-Flow Diagram.
Product Market
Businesses
Households
Factor Market
14
The Circular-Flow Diagram.
Product Market


Flow of Dollars
Businesses
Households


Factor Market
15
The Circular-Flow Diagram.
Product Market


Businesses
Households


Factor Market
16
Model II Production Possibilities Frontier

• Shows All Combos of 2 Goods given
• technology
• resources
• fully efficiently used

17
Shows . . .

• Efficiency
• Tradeoffs
• Opportunity Cost
• Economic Growth

18
Production Possibilities Frontier
Cars
Computers
19
Production Possibilities Frontier
Cars
Computers
20
Production Possibilities Frontier
1000
Y
Cars
Z
Computers
3000
21
Production Possibilities Frontier
1000
Y
700
Cars
Computers
3000
22
Production Possibilities Frontier
1000
Y
700
Cars
Computers
3000
2000
23
Production Possibilities Frontier
Unobtainable Scarcity
1000
A
V
700
Cars
Efficient
Inefficient
W
Computers
3000
2000
24
Production Possibilities Frontier
Unobtainable Scarcity
1000
A
V
700
Cars
Efficient
Inefficient
W
100
Computers
500
3000
2000
25
Production Possibilities Frontier
1000
A
700
Cars
Computers
3000
2000
26
Production Possibilities Frontier
1000
A
700
Cars
Computers
3000
2000
27
Production Possibilities Frontier
1000
A
700
Cars
B
300
Computers
2800
3000
2000
28
Production Possibilities Frontier
1000
Tradeoffs
A
700
Cars
B
Computers
3000
2000
29
Production Possibilities Frontier
1000
Cars
Computers
3000
30
Production Possibilities Frontier
1000
Cars
Computers
3000
31
Production Possibilities Frontier
Growth
1000
Cars
Computers
3000
32
10 Second Neck-Stretch Break Time!
Needed That!
You think that was funny? I didnt think that
funny.
33
Roles of Economists . . .

• Scientists
• and
• Policymakers.

34
Positive versus Normative

• Positive descriptive analytic.
• Normative reflect individual opinions .

35
Positive or Normative?

• A rise in the minimum wage raises unemployment.

36
Appendix Reading Graphs

• Supply Demand Curves

37
Vertical Horizontal Axes
Price
Quantity
38
Demand Curve
Price
A

5
1
Demand
2000
Quantity
39
Demand Curve
Price
A

5
1
.50
B
Demand
2000
2500
Quantity
40

• 84 50 DD 1.40 2.7 13 20351 53 51 51 -1

Hi Lo Close
Volume
Change
Were the Crusty Critters and were here to show
the financial page
Ticker Symbol
Y E I L D
52 Week High Low
Dividend
PE Ratio
Yeah!