Topic #2: Thinking Like an Economist
Dr David Penn
Associate Professor of Economics and Director of the Business and Economic Research Center
Thinking Like an Economist
Economics – the study of how a society allocates scarce resources.
With limited resources and unlimited wants, we must make choices.
There is no free lunch (there is always a cost)
Thinking Like an Economist
Positive economics – deals with ‘what is’ Normative economics – has to do with ‘what
should be’
Thinking Like an Economist
Normative or Positive? The unemployment rate is 5.5 percent. The price of gasoline is too high. Sales taxes are worse than income taxes. Wages are the largest component of income. When gasoline prices rise, consumption drops. The government should be more involved in
health care.
Thinking Like an Economist
Microeconomics – focuses on individual markets and industries; ‘little picture’ Competition Efficiency Trade Market failures
Thinking Like an Economist
Macroeconomics – issues for the whole economy; ‘big picture’ Unemployment Economic growth Inflation Trade Business cycles
Thinking Like an Economist
Macroeconomics or microeconomics? Standard Oil once was the prime example of
monopoly. Unemployment is still a major problem for the
economy. Inflation is less of a problem than it has been in
years. A tax on imported oil will increase the price of
gasoline. Anti-trust laws are needed to prevent the
concentration of market power in a particular industry.
Households benefit when they can purchase a good for a price that is less than they are willing to pay.
Market economy Most of the economies in the world are market
economies to at least some degree. Market economies are characterized by
individuals and businesses making decisions based on incentives.
Example: price is a powerful incentive When the price of gasoline rises:
Consumers use less Refiners make more
Did society or government have to require consumers to use less gasoline or refiners to make more?
Command economy Very few economies rely on government direction to
determine what goods are produced and in what quantities. North Korea Cuba
In many economies, however, government rules govern the prices of some goods and services.
Example: the price of gasoline is subsidized in Iran Result: consumers use too much and local refiners do not
make enough gasoline The degree of government intervention varies from
nation to nation. Not all government intervention in the economy is bad.
Thinking Like an Economist
Economics is a social science It is difficult to use experiments to test
economic theories (but the field of experimental economics is growing rapidly)
Consequently, economists use economic models to test theories
Thinking Like an Economist
Three important economic models: Production possibilities frontier Circular flow diagram Gains from trade analysis
These models will be examined in the next three presentations.