Chapter_2_Outline_THINKING_LIKE_AN_ECONOMIST - Chapter 2 THINKING LIKE AN ECONOMIST By the end of this chapter you should understand 1 how economists

Chapter_2_Outline_THINKING_LIKE_AN_ECONOMIST - Chapter 2...

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Chapter 2: THINKING LIKE AN ECONOMIST By the end of this chapter, you should understand: 1 how economists apply the methods of science. 2 how assumptions and models can shed light on the world. 3 two simple models—the circular flow and the production possibilities frontier. 4 the difference between microeconomics and macroeconomics. 5 the difference between positive and normative statements. 6 the role of economists in making policy. 7 why economists sometimes disagree with one another. Chapter 2 develops how economists approach problems while Chapter 3 will explain how individuals and countries gain from trade. In this chapter, who will learn how economists attempt to approach economic problems in a dispassionate systematic way. o They will see how economists employ the scientific method, the role of assumptions in model building, and the application of two specific economic models. o We will also learn the important distinction between two roles economists can play: as scientists when we try to explain the economic world, and as policymakers when we try to improve it. KEY POINTS: Economists try to address their subject with a scientist’s objectivity. o Like all scientists, they make appropriate assumptions and build simplified models in order to understand the world around them. o Two simple economic models are the circular-flow diagram, and the production possibilities frontier. The field of economics is divided into two subfields: o microeconomics Microeconomists study decision-making by households and firms and the interaction among households and firms in the marketplace. o macroeconomics. Macroeconomists study the forces and trends that affect the economy as a whole. A positive statement is an assertion about how the world is. A normative statement is an assertion about how the world ought to be.
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o When economists make normative statements, they are acting more as policy advisers than scientists. Economists who advise policymakers offer conflicting advice either because of: o differences in scientific judgments, or o because of differences in values. At other times, economists are united in the advice they offer, but policymakers may choose to ignore it. I. The Economist as Scientist Economists follow the scientific method. o Observations help us to develop theory. o Data can be collected and analyzed to evaluate theories. o Using data to evaluate theories is more difficult in economics than in physical science because economists are unable to generate their own data, and must make do with whatever data are available. Thus, economists pay close attention to the natural experiments offered by history. Assumptions make the world easier to understand.
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  • Fall '08
  • Staff
  • Economics, production possibilities, Economists