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There is a new In the News feature on "Actual Economists and Virtual Realities." Figure A-1 has been
updated.
LEARNING OBJECTIVES:
two simple models—the circular flow and the production possibilities frontier.
15
© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
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 interaction 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:
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.
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.
© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Chapter 2/Thinking Like an Economist ❖ 17
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.
2. The goal of a model is to simplify reality in order to increase our understanding. This is
where the use of assumptions is helpful.
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.
© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
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of labor statistics established, factories, mines, and workshops
inspected, the employment of children under fourteen years of age
forbidden, and wages paid in cash.
Fourth. Slavery being simply cheap labor, and cheap labor being
simply slavery, the importation and presence of Chinese serfs
necessarily tends to brutalize and degrade American labor; therefore,
immediate steps should be taken to abrogate the Burlingame treaty.
Fifth. Railroad land grants forfeited by reason of non-fulfillment of
contract should be immediately reclaimed by the government, and,
henceforth, the public domain reserved exclusively as homes for
actual settlers.
Sixth. It is the duty of Congress to regulate inter-state commerce.
All lines of communication and transportation should be brought
under such legislative control as shall secure moderate, fair, and
uniform rates for passenger and freight traffic.
Seventh. We denounce as destructive to property and dangerous to
liberty the action of the old parties in fostering and sustaining
gigantic land, railroad, and money corporations, and monopolies
invested with and exercising powers belonging to the government,
and yet not responsible to it for the manner of their exercise.
Eighth. That the constitution, in giving Congress the power to
borrow money, to declare war, to raise and support armies, to
provide and maintain a navy, never intended that the men who
loaned their money for an interest-consideration should be preferred
to the soldiers and sailors who periled their lives and shed their
blood on land and sea in defense of their country; and we condemn
the cruel class legislation of the Republican party, which, while
professing great gratitude to the soldier, has most unjustly
discriminated against him and in favor of the bondholder.
Ninth. All property should bear its just proportion of taxation, and
we demand a graduated income tax.
Tenth. We denounce as dangerous the efforts everywhere manifest
to restrict the right of suffrage.
Eleventh. We are opposed to an increase of the standing army in
time of peace, and the insidious scheme to establish an enormous
military power under the guise of militia laws.
Twelfth. We demand absolute democratic rules for the
government of Congress, placing all representatives of the people
upon an equal footing, and taking away from committees a veto
power greater than that of the President.
Thirteenth. We demand a government of the people, by the people,
and for the people, instead of a government of the bondholder, by the
bondholder, and for the bondholder; and we denounce every attempt
to stir up sectional strife as an effort to conceal monstrous crimes
against the people.
Fourteenth. In the furtherance of these ends we ask the co-
operation of all fair-minded people. We have no quarrel with
individuals, wage no war on classes, but only against vicious
institutions. We are not content to endure further discipline from our
present actual rulers, who, having dominion over money, over
transportation, over land and labor, over the press and the
machinery of government, wield unwarrantable power over our
institutions and over life and property.
1880.—Democratic Platform,
Virginia Readjuster.
Virginia Democratic.
1884—Democratic Platform.
1884.—Republican Platform.