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The Economic Way of Thinking. The Scientific Method uses abstract models to help understand how a complex real-world operates. The Scientific Method develops theory , collects and analyzes data to prove the theory. The Circular-Flow Model.

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the economic way of thinking
The Economic Way of Thinking
  • The Scientific Methoduses abstract modelsto help understand how a complex real-world operates.
  • The Scientific Methoddevelops theory, collects and analyzesdata to prove the theory.
the circular flow model
The Circular-Flow Model
  • Provides a simple way of describing all the economic transactions that occur in a Market Economy.
  • Emphasizes decentralization in that economic decisions are made by Households and Businesses in Product and Resource Markets.
diagram the circular flow model
Diagram: The Circular-Flow Model

Product Markets

$

$

Dollar Flow

Real Flow

Businesses

Households

$

$

Resource Markets

microeconomics and macroeconomics
Microeconomics and Macroeconomics
  • Microeconomics focuses on “the individual parts of the economy.”
    • e.g. individual markets
    • e.g. price increase in the house market
  • Macroeconomicslooks at the “economy as a whole.”
    • e.g. aggregate of markets
    • e.g. average price increase for all goods
a second economic model production possibilities frontier
A Second Economic Model: Production Possibilities Frontier….

… is a graph that shows the various combinations of output that the economy can possibly produce given the available factors of production and technology.

production possibilities frontier
Production Possibilities Frontier

E

3000

A

2000

Computers

F

Cars

1000

0

700

production possibilities frontier1
Production Possibilities Frontier

E

3000

A

2000

Computers

F

Cars

1000

0

700

principles of economics illustrated by the production possibilities frontier
Principles of Economics Illustrated by the Production Possibilities Frontier . . .
  • Efficiency
  • Tradeoffs
  • Opportunity Cost
  • Economic Growth
production possibilities frontier2
Production Possibilities Frontier

E

Efficient

Resource Use

3000

A

2000

B?

1000

Computers

F

Cars

1000

0

300

700

production possibilities frontier3
Production Possibilities Frontier

E

Tradeoffs

3000

A

2000

C

1000

Computers

F

Cars

1000

0

700

900

production possibilities frontier4
Production Possibilities Frontier

Opportunity Cost of next 200 cars

is 1000 computers. Opportunity

cost of 1 car is 5 computers

E

3000

2000

A

Opportunity

Cost

C

1000

Computers

F

Cars

1000

0

700

900

production possibilities frontier5
Production Possibilities Frontier

Economic Growth

3000

2000

1000

Computers

Cars

1000

0

300

700

positive versus normative analysis
Positive versus Normative Analysis
  • Positive: Statements or assertions dealing with matters of fact or questions about how things are (descriptive analysis).
  • Normative: Statements that reflect individual opinions (prescriptive analysis).
positive or normative statements
Positive orNormative Statements?
  • 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.
  • The income gains from a higher minimum wage are worth more than any slight reduction in employment.
  • Provincial governments should be allowed to collect from tobacco companies the costs of treating smoking-related illnesses among the poor.
economists in government
Economists in Government . . .
  • Department of Finance - formulate tax policy.
  • Industry Canada - design competition policy.
  • Foreign Affairs - assist with trade agreements.
  • Human Resources Development Canada - formulate labour market policies.
  • Bank of Canada - implement monetary policy.
  • Environment Canada - design environmental policy.
economists in the private sector
Economists in the Private Sector . . .
  • C.D. Howe Institute - suggest policy options.
  • Fraser Institute - suggest policy options.
  • Provide forecasts for companies.
  • Assist firms manage resources efficiently.
  • Assist with investment decisions.
do economists always agree with each other three reasons why they don t
Do Economists Always Agree With Each Other? Three reasons why they don’t:
  • Disagree about the validity of alternative positive theories
  • Each have different values, thus different normative views
  • Advice of charlatans or cranks complicates ability to agree
thinking like an economist
Thinking Like an Economist . . .
  • Economics uses the scientific approach.
  • Economics is divided into Microeconomics and Macroeconomics.
  • Economics is analyzed through both Positive and Normative statements.