ECON 1000 Chapter Notes - Chapter 2: Scientific Method, Normative Economics, Global Affairs Canada
17 May 2018
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ECON 1000
CHAPTER 2: THINKING LIKE AN ECONOMIST
The economist as scientist
Economists devise theories, collect data, and then analyze these data in an attempt to verify or
refute their theories.
The scientific method: Observation, Theory, and more Observation
An economist might live in a country experiencing rapidly increasing prices and be moved by
this observation to develop a theory of inflation. The theory might assert that high inflation
arises when the government prints too much money. To test this theory, the economist could
collect and analyze data on prices and money from many different countries.
Although economist use theory and observation like other scientists, they do face an obstacle
that makes their task especially challenging: in economics, conducting experiments is often
ipratial. Eooists studyig iflatio are ot alloed to aipulate a atio’s oetary
policy simply to generate useful data.
Economists pay close attention to the natural experiments offered by history.
The role of assumptions
Assumptions can simplify the complex world and make it easier to iunderstand. To study the
effects of international trade, for example, we might assume that the world consists of only 2
countries and that each country produces only 2 goods. By considering this, we can focus our
thinking on the essence of the problem.
Suppose that we want to study what happens to the economy when the government changes
the number of dollars in circulation. An important piece of this analysis, it turns out, is how
prices respond. For studying the short-run effects of the policy, we may assume that prices do
snot change much. For studying the long-run effects of the policy, we may assume that all
prices are completely flexible.
Economic models
Economists use diagrams and equations. Economic models omit many details to allow us to see
what is truly important.
First model: The circular-flow diagram
We need a model that explains, in general terms, how the economy is organized and how
participatns in the economy interact with one another. In this model, the economy is simplifief
to include only 2 types of decision makers—households and firms. Firms produce goods and
serviced using inputs such as labour, land, and capital. These inputs are called the factors of
production. Households own the factors of production and consume all the goods and services
that the firms produce.
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Document Summary
Economists devise theories, collect data, and then analyze these data in an attempt to verify or refute their theories. The scientific method: observation, theory, and more observation. An economist might live in a country experiencing rapidly increasing prices and be moved by this observation to develop a theory of inflation. The theory might assert that high inflation arises when the government prints too much money. To test this theory, the economist could collect and analyze data on prices and money from many different countries. Although economist use theory and observation like other scientists, they do face an obstacle that makes their task especially challenging: in economics, conducting experiments is often i(cid:373)pra(cid:272)ti(cid:272)al. E(cid:272)o(cid:374)o(cid:373)ists studyi(cid:374)g i(cid:374)flatio(cid:374) are (cid:374)ot allo(cid:449)ed to (cid:373)a(cid:374)ipulate a (cid:374)atio(cid:374)"s (cid:373)o(cid:374)etary policy simply to generate useful data. Economists pay close attention to the natural experiments offered by history. Assumptions can simplify the complex world and make it easier to iunderstand.
