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The economist as social scientist

Lecture Notes: Econ 203 Introductory Microeconomics Lecture/Chapter 2: Economic thinking and practice M. Cary Leahey Manhattan College Fall 2012. The economist as social scientist. Art versus science (Nobel prize example) Role of scientist, explaining the world

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The economist as social scientist

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  1. Lecture Notes: Econ 203 Introductory MicroeconomicsLecture/Chapter 2: Economic thinking and practiceM. Cary LeaheyManhattan CollegeFall 2012

  2. The economist as social scientist • Art versus science (Nobel prize example) • Role of scientist, explaining the world • Role of policy advisor, trying to improve it

  3. Assumptions and models • Assumptions to help simplify things (assume a can opener) • Model: simple representation of complex reality-”ballpark”

  4. Models: circular flow diagram • Circular flow-visual model of economy • Two types of economic actors: households and firms • Two markets: goods and services and factors of production

  5. FIGURE 1: The Circular-Flow Diagram Revenue Spending Markets for Goods & Services G & S sold G & S bought Firms Households Factors of production Labor, land, capital Markets for Factors of Production Income Wages, rent, profit 5

  6. Models: Production possibilities frontier (PPF) • The PPF shows the combinations of 2 goods (x, y axis) that can be produced given available resources • Review points along the PPF from Figure 2 • PPF is possible and efficiency • PPF and opportunity cost-shifting resources along the PPF • Slope of PPF is the opportunity cost—the rise over the run

  7. Figure 2: PPF Example E D C B A 7

  8. Models: Economic growth and the PPF • Economic growth shifts the PPF outward • Additional resources= additional output • Shape of PPF shows how opportunity costs can change • Straight PPF = same tradeoff • Bowed PPF opportunity costs changes • Steeper = higher opportunity cost • Why= intensity of resource use

  9. Micro versus macro • Micro – study of individual firms and households • Macro – study of aggregate activity • More agreement on micro than macro basics

  10. Economist as policy advisor • Positive economics-world as it is • Normative economics-would as it should be • Positive statements can be refuted “scientific” • Normative statement is a value judgment • Many economist shy away from value judgments • Where do economist do policy work? (Mankiw plug) • Sources of disagreements are mainly on policy prescriptions, not bedrock economic concepts • Who has studied economics; the list might surprise you (Tiger, the Terminator)

  11. Summary • Economists explain the world using models with built-in assumptions • Two simple models are circular flow and the PPF • Micro is the study of individual behavior; macro is on the aggregate • Positive versus normative economics

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