Principles of Economics Part Two Thinking like an economist

The economist as scientist

Economist approach study of economy in much the same way as a physicist approaches the study of matter and a biologist approaches the study of life. The whole of science is nothing more than the refinement of everyday thinking – Albert Einstein.

• 1, The scientific method: observation, theory, and more observation.

E.g. an economist lives in a country experiencing rapid increases in price and by this observation develop a theory of inflation. Then to test this theory, finally get a conclusion.

Experiments are often difficult in economics. Large numbers of data are processed during long period time.

Experiments need different roles of assumption and economic models.

E.g. the circular-flow diagram

E.g. the production possibilities frontier

• 2, Microeconomics and macroeconomics

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

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

Microeconomics and macroeconomics are closely intertwined. Because changes in the overall economy arise from the decisions of millions of individuals, and decision depends on understanding macroeconomic developments.

Despite the inherent link between microeconomics and macroeconomics, the two fields are distinct.

The economist as policy adviser

• 1, Positive versus normative analysis

Positive statements are descriptive as what scientist says

E.g. minimum-wage laws cause unemployment.

Normative statement are perspective as what policy adviser says

E.g. the government should raise the minimum wage.

• 2, Economist in Washington

President Harry Truman once said that he wanted to find a one-armed economist. When he asked his economist for advice, they always answered, “on the one hand…, one the other hand…”

Why economists disagree

• 1, Difference in scientific judgments

Economists may disagree about the validity of alternative positive theories about how the world works.

E.g. economists disagree about whether the government should levy taxes based on a household’s income or its consumption (spending).

• 2, Difference in values

Economists may have different values and, therefore, different normative views about what policy should try to accomplish.

E.g. Peter has income of $50000 and is taxed $5000, or 10 percent of his income. Paul has income of $10000 and is taxed $2000, or 20 percent of his income. Is this policy fair?

• 3, Perception versus reality

Because of differences in scientific judgments and differences in values, some disagreement among economists is inevitable