Mid term 2 b

Summary

- Economists try to address their subject with a scientist's objectivity. Like all scientists, they make appropriate assumptions and build simplified models in order to understand teh world around them. Two simple economic models are the circular-flow diagram and the production possibilites frontier.

-The field of economics is divided into two subfields: microeconomics and macroeconomics. Microeconomists study decision making by household adn firms and the interaction among households and firms in the marketplace. Macroeconomics study the forces and trends that affect teh 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 actng mor as policy advisers than scientists.

-Economists who advise policymakers offer conflicting advice either b/c of differences in scientific judgements or cause of differences in values. At other times, economists are united in the advice they offer, but policymakers may choose to ignore it

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Production possibilities frontier

-a graph that shows the combinations of output that the economy can possibly produce given the avaliable factors of production and the avaliable production technology.

microeconomics

the study of how households and firms make decisions and how they interact in markets

macroeconomics

the study of economy-wide phenomena, including inflation, unemployment, and economic growth.

positive statements

claims that attempt to describe the world as it is.

normative statements

claims that attempt to prescribe how the world should be

How is Economics like a science?

-They devise theories
- analyze data
-attempt to verify or refute their theories.

Why do economists make assumptions?

-assumptions can simplify the complex world and make it easier to understand.

Should an economic model describe reality exactly?

- no they should omit details to allow us to see what is truly important.

Draw and explain a production possibilities frontier for an economy that produces milk and cookies. What happens to this frontier if disease kills half of the economy's cow population?

If half the cow population was to die, than the supply of milk would decrease and therefore the price of milk would increase.

Use a production possibilities frontier to describe the idea of "efficienecy."

if you can produce a good efficiently than you can make more of it for less money. Therefore you can increase supply.

What are the two subfields into which economics is divided? Explain what each subfield studies.

1. Microeconomics - the study of how households and firms make decisions and how they interact in markets.
2. Macroeconomics - the study of economy-wide phenomena, including inflation, unemployment, and economic growth.

What is the difference between a positive and a normative statement? Give an example of each.

Positive statement: claims that attempt to describe the world as it is. Ex: Minimum-wage laws cause unemployment.
Normative: claims that attempt to prescribe how the world should be. Ex: The government should raise the minimum wage.