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1、CHAPTER 3Thinking Like an Economist1Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.Questions Is economics a science? What do economists mean by a model? Why do economists use mathematical models so much? What patterns and habits of thought must you learn to successfully think
2、like an economist?2Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.Economics is a social sciencefocuses on human beings and how they behave debates within economics last longer than those in natural sciences less likely to end in consensus economists are unable to undertake lar
3、ge-scale experiments the subjects studied by economists-people- have minds of their own expectations of the future play an important role3Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.The Importance of Expectations: An Example The stock market crash of 1929 changed what Ameri
4、cans expected about the future of the economy Expectations that future income would be lower became realized spending productionlayoffs income4Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.Figure 3.1 - The Stock Market, 1928-19325Copyright 2002 by The McGraw-Hill Companies, I
5、nc. All rights reserved.Economics is a quantitative scienceuses arithmetic to measure economic variables of interestuses mathematical models to relate economic variables of interest involves a particular way of thinking about the world using unique technical languagea specific set of data6Copyright
6、2002 by The McGraw-Hill Companies, Inc. All rights reserved.Economists use a special set of analogies and metaphors to describe the functioning of the macroeconomycurves “shift”money has a “velocity”the central bank “pushes the economy up the Phillips curve”7Copyright 2002 by The McGraw-Hill Compani
7、es, Inc. All rights reserved.Figure 3.2 - Pushing the Economy Up the Phillips Curve8Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.Dominant Concepts the image of the “circular flow of economic activity” the use of the word “market” the idea of “equilibrium” use of graphs and d
8、iagramsequations depicted by geometric curvessituations of equilibrium occur where curves crosschanges in economy demonstrated by shifts in the curves9Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.The Circular Flow patterns of spending, income, and production flowing through
9、the economyflow of purchasing power10Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.The Circular Flow “income side”firms buy the factors of production from householdsmoney payments flow from firms to households “expenditure side”households buy goods and services from firmsmone
10、y payments flow from households to firms11Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.Figure 3.3 - The Circular Flow Diagram12Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.Circular Flow can be made to be more realistic by addingthe governmentfinancia
11、l marketsinternational trade and finance13Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.Figure 3.4 - The Circular Flow ofEconomic Activity14Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.Different Measures of the Circular Flow “expenditure side” measure
12、consumptioninvestmentgovernment purchasesnet exports “income side” measurepurchases of labor, capital, and natural resources owned directly or indirectly by households15Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.Different Measures of the Circular Flow “uses of income” meas
13、urewhere households decide to use their income saving taxes consumption16Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.Markets are used as a metaphor for the complex processes of matching and exchange that take place in the economyeconomists assume that buyers and sellers are
14、 well-informed about prevailing prices and quantities17Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.Equilibrium is a point (or points) of balance at which some economic quantity is neither rising nor fallingonce equilibrium is identified, economists can determine how fast ec
15、onomic forces will push the economy to the points of equilibrium18Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.Graphs and Equations an algebraic equation relating two variables can also be represented as a curve drawn on a graph the solution to a set of two equations is the
16、point on a graph where the two curves that represent the equations intersect19Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.Figure 3.5 - Two Forms of the Production Function20Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.Using Graphs Instead of Equatio
17、ns behavioral relationships become curves that shift around on a graph conditions of economic equilibrium can be represented by the points where the curves describing behavioral relationships intersect21Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.Using Graphs Instead of Equ
18、ations changes in the state of the economy can be shown as movements in the intersection of the curves22Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.Building Models restrict the problem to only a few behavioral relationships and equilibrium conditions capture these relations
19、hips and equilibrium conditions in simple algebraic equationsuse diagrams to represent the equations apply the model to the real world23Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.Important Concepts in Macroeonomic Models representative agentsassume that all participants in
20、 the economy are the sameexamine the decision-making of one individual and then generalize to the economy as a whole24Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.Important Concepts in Macroeonomic Models opportunity costsoccur when any decision is mademeasured by the value
21、of the best alternative foregone25Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.Important Concepts in Macroeonomic Models expectation formationmacroeconomic models must explain the amount of time people spend thinking about the future the information that people have availabl
22、e the rules of thumb used to turn information into expectations26Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.Important Concepts in Macroeonomic Models expectation formationstatic expectations decision makers do not think about the futureadaptive expectations decision makers
23、 assume that the future is going to be like the recent past27Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.Important Concepts in Macroeonomic Models expectation formationrational expectations decision makers spend as much time as they can thinking about the future and know as
24、 much about the structure and behavior of the economy as the model builder does28Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.Building and Solving an Economic Model write equations that represent behavioral relationshipsstate how the “effects” are related to the “causes” dra
25、w a diagram to help visualize the relationship consider equilibrium conditionscan be shown as intersections on diagram29Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.Building and Solving an Economic Model: An Example The production function relatesthe economys capital-labor r
26、atio (K/L)the level of technology or efficiency of the labor force (E)the level of real GDP per worker (Y/L)EF(K/L,Y/Lt Cobb-Douglas production function-1tE(K/L)Y/L30Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.Building and Solving an Economic Model: An Example Equilibrium c
27、ondition for balanced growththe ratio of the economys capital stock (K) to its level of output (Y) must be constantgns*K/Y31Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.Building and Solving an Economic Model: An Example Equilibrium condition for balanced growthgns*K/Y s=shar
28、e of total income in the economy saved and invested n=proportional growth rate of the labor force g=proportional growth rate of the efficiency of the labor force =the depreciation rate32Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.Building and Solving an Economic Model: An E
29、xample arithmetic can be used to determine the steady-state output per worker53%1%1%25%gns*K/YLet E=$10,000, =1/2, s=25%, n=1%, g=1%, and =3%.33Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.Building and Solving an Economic Model: An Example since K/Y=5, this must imply that K
30、/L=5 Y/L substituting for and Et in the Cobb-Douglas production function53%1%1%25%gns*K/Y(0.5)(0.5)10,000(K/L)Y/L34Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.Building and Solving an Economic Model: An Example in equilibrium, both conditions must hold100K/L5Y/L5K/L250,000$K
31、/L 50,000$Y/L 35Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.Building and Solving an Economic Model: An Example algebra can be used to determine the steady-state output per worker-1E(K/L)Y/L-1E(K/Y)Y/L)(Y/L-1-1E(K/Y)(Y/L)36Copyright 2002 by The McGraw-Hill Companies, Inc. Al
32、l rights reserved.Building and Solving an Economic Model: An Example putting in the balanced-growth conditionE(K/Y)(Y/L)1Egns(Y/L)137Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.Building and Solving an Economic Model: An Example Let E=$10,000, =1/2, s=25%, n=1%, g=1%, and =3
33、%10,000.03.01.010.25(Y/L)0.50.5$50,000(Y/L) 38Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.Building and Solving an Economic Model: An Example graphs can also be used to show the steady-state output per workerthe production function can be drawn with output per worker (Y/L) o
34、n the vertical axis and capital per worker (K/L) on the horizontal axisthe equilibrium condition for balanced growth can also be shown K/L=s/(n+g+) 39Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.Figure 3.6 - Equilibrium Output per Worker40Copyright 2002 by The McGraw-Hill Co
35、mpanies, Inc. All rights reserved.The Advantages of Using Algebra best way to summarize cause-and-effect behavioral relationshipsallows us to consider different possible systematic relationships by changing the value of parameters41Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserve
36、d.Figure 3.7 - A Single Equation, a Hostof Relationships42Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.Figure 3.8 - Changing Parameter Values and the Shape of the Cobb-Douglas Production Function43Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.Figure 3
37、.9 - The Effect of Changes in the Efficiency of Labor on the Shape of the Production Function44Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.Chapter Summary Dont be surprised to find economists ways of thinking strange and new-that is always the case when you learn any new in
38、tellectual discipline Dont be surprised to find economics more abstract than you thoughtTodays economic courses focus more on analytic tools and chains of reasoning and less on institutional descriptions45Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.Chapter Summary Economics
39、 is a relatively mathematical subject because so much of what it analyzes can be measuredEconomists use arithmetic to count things and use algebra because it is the best way to analyze and understand arithmetic46Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.Chapter Summary Wh
40、en macroeconomists build models, they usually follow four key strategiesstrip down a complicated process to a few economy-wide behavioral relationships and equilibrium conditionsignore differences between people in the economylook at opportunity costsfocus on expectations of the future47Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.