1: FIGURE The Circular-Flow Diagram
Revenue
G&S
sold
Markets for
Goods &
Services
Firms
Factors of
production
Wages, rent,
profit
Spending
G&S
bought
Households
Markets for
Factors of
Production
THINKING LIKE AN ECONOMIST
Labor, land,
capital
Income
1
FIGURE 1 +: Ningning and Damn Good Noodle
Revenue
Noodle
Markets for
Goods &
Services
Damn Good
Noodle
Labor,
microwave
Wages, capital
purchase
Spending
Noodle
Ningning
Markets for
Factors of
Production
THINKING LIKE AN ECONOMIST
Part-time job,
microwave
Income
2
What do you think?
1. Ningning have a part-time job in the
Damn Good Noodle. Today, he got 2week payroll from the store.
2. Ningning have a excellent microwave for
sale. The noodle store bought the
microwave from Ningning for 50 dollars.
3. Ningning felt hungry last night, so he
ordered a delivery service from the
Damn Good Noodle.
3
Figure 2
The production possibilities frontier
Quantity of
Computers
Produced
C
F
3,000
A
2,200
2,000
B
Production
Possibilities
Frontier
D
1,000
E
0
300
600 700
1,000 Quantity of
Cars
Produced
4
Figure 3
A shift in the production possibilities frontier
Quantity of
Computers
Produced
4,000
3,000
G
2,300
2,200
A
0
600 650
1,000 Quantity of
Cars Produced
5
The Economist as a Scientist
Microeconomics
is the study of how households and firms make
decisions and how they interact in markets.
Macroeconomics
is the study of economy-wide phenomena,
including inflation, unemployment, and
economic growth.
These two branches of economics are
closely intertwined, yet distinct they
address different questions.
THINKING LIKE AN ECONOMIST
6
The Economist as a Policy Adviser
Positive vs. Normative analysis
Positive statements
Attempt to describe the world as it is
Descriptive
Confirm or refute by examining evidence
Normative statements
Attempt to prescribe how the world should
be
Prescriptive
7
ACTIVELEARNING3
ACTIVELEARNING
Identifying positive vs. normative
Which of these statements are positive and which
are normative? How can you tell the difference?
a. Prices rise when the government the
quantity increases of money.
b. The government should print less money.
c. A tax cut is needed to stimulate the economy.
d. An increase in the price of burritos will cause an
increase in consumer demand for video rentals.
8
ACTIVELEARNING3
ACTIVELEARNING
Answers
a. Prices rise when the government increases the
quantity of money.
Positive describes a relationship, could use
data to confirm or refute.
b. The government should print less money.
Normative this is a value judgment, cannot be
confirmed or refuted.
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ACTIVELEARNING3
ACTIVELEARNING
Answers
c. A tax cut is needed to stimulate the economy.
Normative another value judgment.
d. An increase in the price of burritos will cause an
increase in consumer demand for video rentals.
Positive describes a relationship.
Note that a statement need not be true to be
positive.
10
Why Economists Disagree
Economists - may disagree
Validity of alternative positive theories
about how the world works
Economists - may have different values
Different normative views about what
policy should try to accomplish
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Why Economists Disagree
Differences in scientific judgments
Different hunches about
Validity of alternative theories
Size of important parameters
Measure how economic variables are related
E.g.: Tax households income or
consumption
Different normative views about the tax
system
Different positive views about the
responsiveness of saving to tax incentives
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Why Economists Disagree
Differences in values
Peter and Paula - take the same amount
of water from the town well
Peters income= $50,000
Tax= $5,000 (10%)
Paulas income= $10,000
Tax= $2,000 (20%)
13
Propositions about Which Most Economists Agree
(and % who agree)
A ceiling on rents reduces the quantity and
quality of housing available. (93%)
Tariffs and import quotas usually reduce
general economic welfare. (93%)
The United States should not restrict
employers from outsourcing work to foreign
countries. (90%)
A minimum wage increases unemployment
among young and unskilled workers.
continued
(79%) AN ECONOMIST
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THINKING LIKE