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Principles of Microeconomics 8th Edition Mankiw Solutions Manual

2 THINKING LIKE AN ECONOMIST

WHAT’S NEW IN THE EIGHTH EDITION:

There is a new Ask the Experts feature on "Ticket Resale."

LEARNING OBJECTIVES:
By the end of this chapter, students should understand:

 how economists apply the methods of science.

 how assumptions and models can shed light on the world.

 two simple models—the circular flow and the production possibilities frontier.

 the difference between microeconomics and macroeconomics.

 the difference between positive and normative statements.

 the role of economists in making policy.

 why economists sometimes disagree with one another.

CONTEXT AND PURPOSE:

Chapter 2 is the second chapter in a three-chapter section that serves as the introduction of the text.
Chapter 1 introduced ten principles of economics that will be revisited throughout the text. Chapter 2
develops how economists approach problems while Chapter 3 will explain how individuals and countries
gain from trade.
The purpose of Chapter 2 is to familiarize students with how economists approach economic
problems. With practice, they will learn how to approach similar problems in this dispassionate systematic
way. They will see how economists employ the scientific method, the role of assumptions in model
building, and the application of two specific economic models. Students 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.

13
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system for classroom use.

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14 ❖ Chapter 2/Thinking Like an Economist

KEY POINTS:
• Economists try to address their subject with a scientist’s objectivity. Like all scientists, 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.

• The field of economics is divided into two subfields: microeconomics and macroeconomics.
Microeconomists study decision making by households and firms and the interactions among
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 advisers than as scientists.

• Economists who advise policymakers sometimes 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 the advice because of the many forces
and constraints imposed by the political process.

CHAPTER OUTLINE:
I. The Economist as Scientist

A. Economists Follow the Scientific Method.

1. Observations help us to develop theory.

2. Data can be collected and analyzed to evaluate theories.

3. 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.

4. Thus, economists pay close attention to the natural experiments offered by history.

B. Assumptions Make the World Easier to Understand.

1. Example: to understand international trade, it may be helpful to start out assuming that
there are only two countries in the world producing only two goods. Once we understand
how trade would work between these two countries, we can extend our analysis to a greater
number of countries and goods.

2. One important role of a scientist is to understand which assumptions one should make.

3. Economists often use assumptions that are somewhat unrealistic but will have small effects
on the actual outcome of the answer.

C. Economists Use Economic Models to Explain the World around Us.

© 2018 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management
system for classroom use.
 Chapter 2/Thinking Like an Economist ❖ 15

To illustrate to the class how simple but unrealistic models can be useful, bring a
road map to class. Point out how unrealistic it is. For example, it does not show
where all of the stop signs, gas stations, or restaurants are located. It assumes that
the earth is flat and two-dimensional. But, despite these simplifications, a map
usually helps travelers get from one place to another. Thus, it is a good model.

1. Most economic models are composed of diagrams and equations.

2. The goal of a model is to simplify reality to increase our understanding. Assumptions help to
simplify reality.

D. Our First Model: The Circular Flow Diagram

Figure 1

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

2. This diagram is a very simple model of the economy. Note that it ignores the roles of
government and international trade.

© 2018 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management
system for classroom use.
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