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Chapter 2

Chapter 2 - Thinking Like an Economist.pdf

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Enrico Moretti

Week I: Chapter 2 I. The Economist as Scientist • scientific method: the dispassionate development and testing of theories about how the world works A. Scientific Method: Observation, Theory, and More Observation • the data economists use relies completely on what the world produces, they cannot manipulate factors for research’s sake • this is unlike physicists studying gravity by dropping objects in laboratories • this is like astronomers and evolutionary biologists B. The Role ofAssumptions • assumptions: used to simplify the complex world and make it easier to understand • the art in scientific thinking is deciding which assumptions to make • e.g. physicists dropping a marble from tall building vs. beach ball • assume marble falls in vacuum; air resistance in reality makes little difference to this assumption • however, air resistance against a beach ball would be much greater, therefore this assumption would make a large difference • thus must make diff. assumptions for diff. studies C. Economics Models • models: omit many details to allow us to see what is truly important • similar to basic anatomy plastic model • assume away all irrelevant details for the question at hand D. The Production Possibilities Frontier • production possibilities frontier (PPF): a graph that shows the various combinations of output that an economy can possibly produce given the available factors of production and available • because resources are scarce, not every conceivable outcome is feasible • i.e. one cannot produce a point to the outside/right of the PPF line • however, all points on or to the left of the PPF line is feasible • efficient outcome: if the economy is getting all it can from the scarce resources it has available • points on vs. inside the PPF represent efficient levels of production • inefficient outcome: points inside the PPF • the PPF also shows concept of trade offs • when having efficient outcomes, making more ofAwill mean making less of B and vice versa • this is related to opportunity cost: what is given up to produce/do something else • the opportunity cost is the slop of the PPF line • e.g. giving up 200 computers to get 100 additional cars means the opportunity cost of 100 cars is 200 computers (i.e. 200 computers ÷ 100 cars = 2, the opportunity cost for 1 car = 2 computers) • the opportunity cost of goodA(y-axis) in terms of number of good B (x-axis) is not necessarily constant • this inconsistency is reflected in a bow shaped PPF line/curve • when the curve is bowed outward, it means the opportunity cost of good B is highest when the economy is producing many cars and few computers; the opportunity cost of good B is highest when the frontier is steep • the opportunity cost is lower when the frontier is flatter • most economists believe PPF graphs are bowed • this is because when most resources make goodAwell, resources best suited to goodA production (e.g. skilled workers) are allotted to it • because these workers probably aren’t good at making good B, economy won’t have to lose much good B production tin creaseAproduction by 1 unit • however, when resources are shifted to make good B, which already had its best workers in it, resources that were best suited to goodAcan no longer make them • thus the opportunity cost for making good B is more than that of making goodA because it takes more resources to make good B thanA • however, new technologies can change maximum outputs for either product E. Microeconomics and Macroeconomics • economics divided into two broad subfields • microeconomics: study of how households and firms make decisions and how they interact in specific markets
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