ch02-Thinking Like an Economist.pptVIP

2 Thinking Like an Economist ACTIVE LEARNING 3 Identifying positive vs. normative Which of these statements are “positive” and which are “normative”? How can you tell the difference? a. Prices rise when the government increases the quantity of money. b. The government should print less money. c. A tax cut is needed to stimulate the economy. d. An increase in the price of burritos will cause an increase in consumer demand for music downloads. ACTIVE LEARNING 3 Answers a. Prices rise when the government increases the quantity of money. Positive – describes a relationship, could use data to confirm or refute. b. The government should print less money. Normative – this is a value judgment, cannot be confirmed or refuted. ACTIVE LEARNING 3 Answers c. A tax cut is needed to stimulate the economy. Normative – another value judgment. d. An increase in the price of burritos will cause an increase in consumer demand for music downloads. Positive – describes a relationship. Note that a statement need not be true to be positive. SUMMARY As scientists, economists try to explain the world using models with appropriate assumptions. Two simple models are the Circular-Flow Diagram and the Production Possibilities Frontier. Microeconomics studies the behavior of consumers and firms, and their interactions in markets. Macroeconomics studies the economy as a whole. As policy advisers, economists offer advice on how to improve the world. * * * * * * * * * * * The “definition” of capital shown on this slide (“buildings and machines”) is the same that appears in the corresponding section of the chapter. A more formal definition will be provided in subsequent chapters. * * This and the following slide build the Circular-Flow Diagram piece by piece. * * In this diagram, the green arrows represent flows of income/payments. The red arrows represent flows of goods and services (including services of the factors of production in the lower half of