ECO111-Microeconomics Chapter

2
Thinking Like
An Economist

Lecturer : Mr. Nguyễn Quốc Quân

Email : quannq6@fe.edu.vn
FPT Education- FPT University Danang Campus
In this chapter,
look for the answers to these questions:
 What are economists’s two roles?
 What are models?
 What are Circular-Flow Diagram? Production
Possibilities Frontier?
 The difference between Positive Statement
and Normative Statement?

2
 Brief Content
1. The Economist as Scientist
a. The Scientific Method
b. The Role of Assumptions
c. Economic Models
d. First Model: The Circular-Flow Diagram
e. Second Model: The Production Possibilities Frontier

2. The Economist as Policy Advisor

f. Positive versus Normative Analysis
g. Economists in Washington
h. Why Economists’ Advice Is Not Always Followed

3. Why Economist Disagree

i. Differences in Scientific Judgement
j. Differences in Values
k. Perception & Reality

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① ② ③
1. The Economist as Scientist
1.a The Scientific Method

Economists play two roles:

1. Scientists : try to explain the world.
2. Policy advisors: try to improve the
world.

THINKING LIKE AN ECONOMIST 4

① ② ③
1. The Economist as Scientist
1.b The Role of Assumptions

Assumptions: simplify the complex world,

make it easier to understand.

Model: a highly simplified representation of a

more complicated reality.

THINKING LIKE AN ECONOMIST 5

① ② ③
1.c. Some Familiar Models

THINKING LIKE AN ECONOMIST 6

① ② ③
1.c. Some Familiar Models

A model of
human
anatomy
from high
school
biology
class

THINKING LIKE AN ECONOMIST 7

① ② ③
1. The Economist as Scientist
1.d. First Model: The Circular-Flow Diagram

Circular-Flow Diagram: shows how dollars flow through

markets among households and firms

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FIGURE 1: The Circular-Flow Diagram

Revenue Spending
Markets for
G&S Goods &
G&S
sold Services bought

Firms Households

Factors of Labor, land,

production Markets for capital
Factors of
Wages, rent, Production Income
profit
THINKING LIKE AN ECONOMIST 9
① ② ③
1. The Economist as Scientist
1.e. Second Model: The Production Possibilities Frontier

Production Possibilities Frontier (PPF):

a graph that shows the combinations of two goods the
economy can possibly produce given the available
resources and the available technology.

THINKING LIKE AN ECONOMIST 10

① ② ③
1. The Economist as Scientist
1.e. Second Model: The Production Possibilities Frontier

THINKING LIKE AN ECONOMIST 11

① ② ③
1. The Economist as Scientist
1.e. Second Model: The Production Possibilities Frontier

The opportunity cost of an item is what must be

given up to obtain that item.

Society faces a tradeoff: Getting more of one good

requires sacrificing some of the other.

THINKING LIKE AN ECONOMIST 12

① ② ③
1. The Economist as Scientist
1.e. Second Model: The Production Possibilities Frontier
Wheat
(tons)
–1000
6,000 slope = = –10 The opportunity
100
5,000 cost of a
4,000 computer is 10
tons of wheat.
3,000
2,000
1,000
0
0 100 200 300 400 500 600
Computers

THINKING LIKE AN ECONOMIST 13

① ② ③
1.e. Second Model: The Production Possibilities Frontier

The PPF: A Summary

 The PPF shows all combinations of two goods that an
economy can possibly produce, given its resources
and technology.
 The PPF illustrates the concepts of tradeoff and
opportunity cost, efficiency and inefficiency,
unemployment, and economic growth.

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① ② ③
1. The Economist as Scientist
1.f. Microeconomics and Macroeconomics

 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.

THINKING LIKE AN ECONOMIST 15

① ② ③
2. The Economist as Policy Advisor
2.a. Positive versus Normative Analysis

 As scientists, economists make

positive statements, which attempt to
describe the world as it is.
 As policy advisors, economists make
normative statements, which attempt to
prescribe how the world should be.
 Positive statements can be confirmed or
refuted, normative statements cannot.

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① ② ③
2. The Economist as Policy Advisor

ACTIVE LEARNING 3
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 increases the
quantity of money.
b. The government should print less money.
c. A tax cut is needed to stimulate the economy.

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ACTIVE LEARNING 3
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.
c. A tax cut is needed to stimulate the economy.
Normative – another value judgment.
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① ② ③
2. The Economist as Policy Advisor
2.b. Economists in Washington

President Harry Truman once said that he

wanted to find a one-armed economist.
When he asked his economists for advice,
they always answered, “On the one hand, .
. . . On the other hand, . . . .”

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① ② ③
3. Why Economists Disagree

Economists often give conflicting policy

advice:
1.Differences in Scientific Judgement
2.Differences in Values
3.Differences in Perception & Reality

THINKING LIKE AN ECONOMIST 20

① ② ③
3. Why Economists Disagree

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%)
 The United States should eliminate agriculture
subsidies. (85%)
THINKING LIKE AN ECONOMIST 21
CHAPTER SUMMARY

 As scientists, economists try to explain the world

using models with appropriate assumptions.
 Two simple models are the Circular-Flow Diagram
and the Production Possibilities Frontier.
 Microeconomics studies the behavior of
consumers and firms, and their interactions in
markets. Macroeconomics studies the economy
as a whole.
 As policy advisers, economists offer advice on how
to improve the world.
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