Thinking Like an

Economist

Chapter 2

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Economics trains you to. . . .

 Be mindful about the choices that you

make.
 Evaluate the cost of individual and social
choices.
 Examine and understand how certain
events and issues are related.
 But there is the issue of terminology, some
math, and GRAPHS, GRAPHS AND SOME
MORE GRAPHS!
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The Economist as a Scientist

The economic way of thinking . . .

 Involves thinking analytically and objectively.
 Makes use of the scientific method.
 Involves the use of abstract models to focus the
discussion on a main idea or theme in the complexity
of the real world.
 To apply the scientific method in economics, assumptions
are used to make the world easier to understand.

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 Economic Models
 Economists use models to simplify reality in
order to improve our understanding of the
world.
 As simplifications of reality, models need
assumptions.

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Graphing Data
 Economists use three types of graphs to reveal
relationships between variables. They are:
 Time-series graphs(A time-series graphs is a line graph where time is measured
on the horizontal axis and the variable being observed is measured on the vertical axis.. Time-
series graphs show the variable’s level, direction of change, speed of change, and trend, which is
its general tendency to rise or fall.)
 Cross-section graphs(show the values of a variable for different groups in a
population at a point in time.)

 Scatter diagrams(plot the value of one variable against the value of another to
show the relationship between two variables. Such a relationship indicates how the variables are
correlated, not whether one variable causes the other)

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Two of the Most Basic
Economic Models Are
 The Circular Flow Diagram
 The Production Possibilities Frontier.

6
The Circular-Flow Diagram
 The circular flow diagram divides the economy
into two sectors:
• one concerned with producing goods and services,
• and the other with consuming them.
  Resources are converted into goods and services
by business, and in this transformed state travel
back to consumers. Money flows in the opposite
direction.

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Contd…
 These flows involve two markets in which
exchange takes place:
 the resource or factor market in which
business buys resources,
 and the goods and services market in which
business sells goods.

8
 The Circular-Flow Diagram
Revenue Spending
Market for
Goods
Goods & Goods &
Services sold and Services
Services
bought

Firms
Households

Inputs for Labor, land,

production Market for and capital
Factors
Wages, rent, of Production Income
and interest 9
Journal Assignment-
Circular Flow Diagram
 Draw a circular flow diagram.
 Identify the parts of the model that
correspond to the flow of goods and
services and the flow of dollars.

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The Production Possibilities
Frontier

•Shows the various combinations of two

goods that can be produced by one firm.
•Assumes two goods
•Assumes fixed technology and fixed
factors of production.

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 The Production Possibilities
Frontier
Quantity of
Computers
Produced
3,000 D

2,200
C
2,000 A

B
1,000

0 300 600 700 1,000 Quantity12of

Cars Produced
 The Production Possibilities
Frontier
Quantity of
Computers
Produced
3,000 D

2,200
C
2,000 A
Production
possibilities
frontier
B
1,000

0 300 600 700 1,000 Quantity

13 of
Cars Produced
Contd…
 As indicated on the chart above, points A and C
represent the points at which production of Good
A and Good B is most efficient. Point B
demonstrates the point at which resources are not
being used efficiently in the production of both
goods; point D demonstrates an output that is not
attainable with the given inputs.

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 Microeconomics and
Macroeconomics
 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.
 How the markets, as a whole, interact at the
national level.

15
 Two Roles of Economists

 When they are trying to explain the

world, they are scientists.
 When they are trying to change the
world, they are policymakers.

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