Thinking Like an Economist

Economics trains you to…
- Think in terms of alternatives.
- Evaluate the cost of individual and social choices.
- Examine and understand how certain events and issues are related.

The Economist as a Scientist

The economic way of thinking…
- Involves thinking analytically and objectively.
- Makes use of the scientific method.
The Scientific Method: Observation, Theory, and More Observation
- Uses abstract models to help explain how a complex, real world operates.
- Develops theories, collects, and analyzes data to evaluate the theories.
The Role of Assumptions
- Economists make assumptions to make the world easier to understand.
- The art in scientific thinking is deciding which assumptions to make.
- Economists use different assumptions to answer different questions.

Economists use models to simplify reality to improve our understanding of the world.
Two of the most basic economic models include:
- The Circular Flow Diagram
- The Production Possibilities Frontier

The circular-flow diagram is a visual model of the economy that shows how dollars flow through markets among households and firms.

The production possibilities frontier is a graph that shows the combinations of output that the economy can possibly produce given the available factors of production and the available production technology.
Concepts Illustrated by the Production Possibilities Frontier
- Efficiency
- Tradeoffs
- Opportunity Cost
- Economic Growth
PPC shape meaning
- bowed out: increasing opportunity cost btw the 2 compared products
- bowed in: decreasing opportunity cost btw the 2 compared products

Microeconomics focuses on the individual parts of the economy.
- How households and firms make decisions and how they interact in specific markets
Macroeconomics looks at the economy as a whole.
- Economy-wide phenomena, including inflation, unemployment, and economic growth

Positive statements are statements that attempt to describe the world as it is.
- Called descriptive analysis
Normative statements are statements about how the world should be.
- Called prescriptive analysis

Positive
- An increase in the minimum wage will cause a decrease in employment among the least-skilled.
- Higher federal budget deficits will cause interest rates to increase.

normative
- The income gains from a higher minimum wage are worth more than any slight reductions in employment.
- State governments should be allowed to collect from tobacco companies the costs of treating smoking-related illnesses among the poor.

Serve as advisers in the policymaking process of the three branches of government:
- Legislative
- Executive
- Judicial

Some government agencies that collect economic data and make economic policy:
- Department of Commerce
- Bureau of Labor Statistics
- Congressional Budget Office
- Federal Reserve Board

They may disagree about the validity of alternative positive theories about how the world works.
They may have different values and, therefore, different normative views about what policy should try to accomplish.

Economists try to address their subjects with a scientist’s objectivity.
- They make appropriate assumptions and build simplified models to understand the world around them.
- Two simple economic models are the circular-flow diagram and the production possibilities frontier.
Economics is divided into two subfields:
Microeconomists study decision-making by households and firms in the marketplace.
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.
When economists make normative statements, they are acting more as policy advisors than scientists.
Economists who advise policymakers offer conflicting advice either because of differences in scientific judgments or because of differences in values.
At other times, economists are united in the advice they offer, but policymakers may choose to ignore it.