Economist
The as Scientist
Economic terms- Supply, demand, elasticity, comparative advantage, consumer
surplus, deadweight loss
Scientific Method- the dispassionate development and testing of theories about
how the world works
The scientific method: observation,theory, and more observation
interplay between theory and observation come into use in the field of economics
In economics, conducting experiments is often difficult and sometimes impossible
economist pay close attention to natural experiments offered by history
The Role of Assumptions
Assumptions can simplify the complex world and make it easier to understand
many prices in the economy change infrequently
use different assumptions for short run and long run effects
Economic Models
use diagrams and equations
Our First Model: The Circular-Flow Diagram
Circular-flow diagram- a visual model of the economy-two decision makers:
firms/households
inputs are the factors of production
In market for goods and services- households buy the output of goods and
services that firms produce
In market for the factors of production- households are sellers and firms are
buyers
does not include government factor of taxes and such
Our Second Model: The Production Possibilities Frontier
Production possibilities frontier- is a graph that shows the various
combinations of output that the economy can possibly produce given the
available factors of production and the available production technology that
firms use to turn these factors into output
outcome is efficient if the economy is getting all can it from the scarce
rescources it has available
Trade offs are effective when there is more of one product and less of the
other =movement along the PPC
Opportunity cost: the cost of something is what you give up to get it=slope
technological advances can cause the PPC to shift
Microeconomics and Macroeconomics
Microeconomics- the study of how households and firms make decisions and
how they interact in specific markets
Macroeconomics- the study of economy-wide phenomena
The Economist as Policy Adviser
economist are Policy advisors
Positive versus Normative Analysis
Positive statements- make a claim about how the world is
Normative statements- perceptive- make a claim about how the world ought to
be- involves ethics, religion and political philosophy(policy advisors use this)
Economists in Washington
a policy might increase efficiency at the cost of equality
The influence of economist on policy goes beyond their role as adviser, their
research and writings often affect policy indirectly
Why Economists' Advice Is Not Always Followed
Economist offer crucial input into the policy process, but their advice is only one
ingredient of a complex recipe
Why Economists Disagree
economist disagree in validity of an alternative view
they had different values
Differences in Scientific Judgement/values
economics is a young science
different advice comes out of difference in values of each economist
Perception versus Reality
Economist agree on many propositions
rect ceiling and tariffs are opposed by economist but still implemented by the
government