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Economics For Managers GTU MBA Sem 1 Chapter 2

This document provides an overview of key concepts in economics. It discusses how economics uses both theory and observation like a science, but faces challenges from politics. It explains that economists use assumptions and models to simplify complex realities. It introduces the circular flow model and production possibilities frontier as examples of common economic models. It distinguishes between microeconomics and macroeconomics and the different roles of economists as scientists and policymakers. Finally, it notes that economists can disagree on positive theories or due to differing normative views.

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Rushabh Vora
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326 views15 pages

Economics For Managers GTU MBA Sem 1 Chapter 2

This document provides an overview of key concepts in economics. It discusses how economics uses both theory and observation like a science, but faces challenges from politics. It explains that economists use assumptions and models to simplify complex realities. It introduces the circular flow model and production possibilities frontier as examples of common economic models. It distinguishes between microeconomics and macroeconomics and the different roles of economists as scientists and policymakers. Finally, it notes that economists can disagree on positive theories or due to differing normative views.

Uploaded by

Rushabh Vora
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
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Chapter: 2 Thinking Like an Economist

Author: Prof. Sharif Memon

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.

Cont
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 uses 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 Circular-Flow Diagram


Revenue

Goods & Services sold

Market for Goods and Services

Spending Goods & Services bought

Firms

Households

Inputs for production


Wages, rent, and profit

Market for Factors of Production

Labor, land, and capital


Income

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.

The Production Possibilities Frontier


Quantity of Computers Produced 3,000

D C

2,200 2,000

1,000

300

600 700

1,000

Quantity of Cars Produced

The Production Possibilities Frontier


Quantity of Computers Produced 3,000

D C

2,200 2,000

A
Production possibilities frontier

1,000

300

600 700

1,000

Quantity of Cars Produced

Quantity of Computers Produced 4,000

The Production Possibilities Frontier


An outward shift in the production possibilities frontier E A

3,000

2,100 2,000

700 750

1,000

Quantity of Cars Produced

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 versus Normative Analysis


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

Why Economists Disagree

They may disagree on theories about how the world works.


They may hold different values and, thus, different normative views.

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