Thinking Like an Economist

ECONOMICS a SCIENCE & POLITICS: The essence of Science however, is the scientific method – the dispassionate development and testing of theories about how the world works.

• The interplay between theory and observation also occurs in the field of Economics.

• The theory might assert that high Inflation arises when the government prints too much money.

• It gets proved when Economist collects and analyzes data on prices and money from country.

• Theory & Observation like science, they do face an obstacle that makes their task especially challenging.

• Experiments are often difficult in Economics – thus shows the sign of politics. A scenario of unanticipation.

THE ROLE OF ASSUMPTIONS:

• Making an assumption greatly simplifies the problem without substantially affecting the answer.

• Assumptions can make the world easier to understand.

• For Instance, once we understand International trade in an imaginary world with two countries and two goods, we are in a better position to understand International trade in the more complex world in which we live.

• Assumptions help knowing the magnitude of at least two or more variables impact in the given Economy.

ECONOMIC MODELS:

• The doctors use major plastic organs like – the heart, liver, kidneys etc. to explain how the body organs functions.

• Likewise, Economist also uses models to learn about the world, but instead of being made of plastic, they are most often composed of diagrams and equations.

• “Models are structures involving relationships among concepts”

• Economic models omit many details to allow us to see what is truly important.

The Circular-Flow Model: The circular-flow model is a simple way to visually show the economic transactions that occur between households and firms in the economy.

The Production Possibilities Frontier: The production possibilities frontier is a graph showing the various combinations of output that the economy can possibly produce, given the available factors of production and technology.

Microeconomics and Macroeconomics:

• Microeconomics focuses on the individual parts of the economy. How households and firms make decisions and how they interact in specific markets
• Macroeconomics looks at the economy as a whole. How the markets, as a whole, interact at the national level.

Two Roles of Economists: When they are trying to explain the world, they are scientists. When they are trying to change the world, they are policymakers.

• Positive statements are statements that describe the world as it is. Called descriptive analysis.
• Normative statements are statements about how the world should be. Called prescriptive analysis.