Chapter 1, Section 4The Economist’s Toolbox

Objectives

• Demonstrate how and why economists use economic models

• Understand how and why economists use statistics, charts, tables, and graphs

• Compare macroeconomics to microeconomics

• Contrast positive economics with normative economics

Discussion

What kind of data do you encounter in your daily lives?

The ability to interpret data in different formats is an essential skill in an increasingly technological world.

Working with Data

• Economics is something we use in everyday life. Economists study how individuals, businesses, and government officials make economic decisions.

• Statistics: numerical data or information. Economists use statistics to see patterns of behavior.

Evaluating Statistics

• Task: Evaluate statistics by determining the mean, median, and mode

• Activity: • You will be divided into three groups and

review the following statistics.

Charity Information

• Below is the yearly charitable giving by families living on Wilcox Avenue.

• Family A: $15; Family B: $0; Family C: $50; Family D: $100; Family E: $15; Family F: $45; Family G: $5,000/ Group 1 find the mean (total donations and divide by the number of families); Group 2 find the median (place numbers in value order and identify number in the middle); Group 3 find the mode (identify which number appears most often)

• You should know that all of these can be considered an “average.”

• Mean=$746.42; Median=$45; Mode=$15

Using Economic Models

• Economists express models in words, graphs, or equations. Models can help economists to predict future economic activity.

• Using Charts and Tables: Economists study statistics to look for trends, connections, and other relationships. Most use charts and tables. This data is arranged and displayed in rows and columns.

Using Graphs

• Economists identify trends in statistics, they use graphs or visual representations. The most common type is the line graph. A line graph is particularly useful for showing changes over time. Line Graphs: use two sets of numbers or variables.

• Bar Graph: used to make comparisons. • Pie Graph: usually called pie charts or circle

graph, representing numbers in relation to a whole.

Analyzing Graphs:Figures 1.8,1.9, and1.10

• Using the graphs on page 26 answer which type of graph would be best to display each of the following:– Ethnic heritage of students at school– Salaries of college-educated women compared to

salaries of college-educated men– State government budget– Growth in the sale of hybrid cars since 1995

Microeconomics and Macroeconomics

• Microeconomics: is the study of the behavior of individual players in the economy, examples would be individuals, families, and businesses.

• Macroeconomics: Study of the behavior in the economy as a whole and involves topics like inflation, unemployment, aggregate demand, and aggregate supply.

Microeconomics

• Micro- meaning small, examines specific, elements in an economy. These elements include prices, costs, profits, competition, and consumers and producers behavior. There are specialized areas within microeconomics; business organizations, labor markets, agricultural and environmental.

Microeconomics

• Microeconomics helps us understand why sandwich shops serve the same food, but some make and other’s don’t.

• The explanation why some students decide to work only on the weekends and not on school nights.

• Why a mom and pop grocery store closes after a superstore opens nearby.

Macroeconomics

• Macro-meaning large, examines the economic “big picture.” Macroeconomics is the study of the economy as a whole.

• Example: the limited spending power of the unemployed person would be microeconomics, the effect of widespread unemployment on the whole nation would be a macroeconomics issue.

Macroeconomics

• Example: rising price of coffee would reflect the interest of microeconomist, the general rise in prices, would be a sign of inflation, this would be of interest to a macroeconomist. Microeconomics considers the individual consumer. Macroeconomics studies the consumer sector called the household sector. Macroeconomics examines studies the business, public, &government sector-the part of our economy that provides goods/services.

Macroeconomics

• Field of economics divided into macroeconomics and microeconomics during the worldwide economic depression in the 1930s. The prevailing economic models were not able to adequately describe the forces that led to the depression. So, economists needed new models and a new perspective. At the same time, national accounting-measuring national income and product statistics-was just coming into use.

• John Maynard Keynes: a British economist was one of the earliest and most important macroeconomists.

Positive Economics andNormative Economics

• Positive economics: describes and explains economics as it is, not as it should be. Positive economics uses verifiable facts, no value judgment.

• Normative economics: describes and explains what economic behavior ought to be, not what it actually is. Normative economics does involve value judgments it seeks to make recommendations for actions.

Positive Economics

• Positive economics uses scientific method to observe data, hypothesize, test, refine and continue testing.

• Example: A state is debating to implement the lottery to help gain money for education. Economist would study states with lotteries to see if educational spending increased after the lotteries were begun.

Normative Economics

• Normative economics is based on value judgments. It goes beyond the facts to ask if actions are good. Values of people differ.

• Two economists agree on the data that state run lotteries result in more money for schools and most lottery tickets are purchased by the poor. They are going to differ because of different values. One economist supports the lottery, the other may be a burden on the poor.

NAFTApage 29

• The North American Free Trade Agreement became effective in 1994 and its goal is to eliminate trade barriers among Mexico, the United States, and Canada. In 1992, Presidential candidate H. Ross Perot predicted that NAFTA would produce a “giant sucking sound” as jobs and investments left the United States for cheaper locations. In the early 1990s, NAFTA was the center of

NAFTA

• normative economic debates but was ultimately supported by President Bill Clinton and enacted. The loss of jobs and investments predicted by Perot has not happened.

Creating an Economic Collage

• Task: With a small group, create a collage from magazine and newspaper illustrations and headlines depicting one kind of economics.

• Materials Needed: magazines and newspapers that can be cut up; eight scissors; glue sticks; paper

Collage Activity Continued

• Activity:• I will divide you into four groups,

corresponding to: microeconomics, macroeconomic, normative economics, and positive economics.

• Groups will find items in newspapers and magazines that illustrate their kind of economics. Use the items to create collages. Label your collage.

Collages Continued

• When the collages are finished, have someone from each group present the collage, explaining each picture.

Current Economic Events Homework

• Task: Find an item in the news that has stirred debate and reflects differing viewpoints within normative economics.

• Examples: may include the future of social security, a labor dispute, occupy a city, or federal funding of education.

Adam SmithPage 30

• Listen and Visualize:• Draw a picture that represents some of the

key ideas in the reading.• You will present you finished work to the class,

explaining why you chose the image you did.