Economists try to address their subject with a scientist's objectivity. They devise theories, collect data, and then analyze these data in an attempt to verify or refute their theories. In other words, they are working with scientific methods.
Why do economists make assumptions?
Because assumptions can simplify the complex world and make it easier to understand.
Should an economic model describe reality exactly?
No, it shouldn't. Economics models are built with assumptions, omitting many details of economy that are irrelevant for studying the question at hand. Models simplify the reality to improve our understanding of it.
Draw and explain a production possibilities frontier for an economy that produce corn and rice. What happens to this frontier if a new fertilizer is developed that increases the amount of corn that can be produced on each acre of land?
Suppose there are 100 acres of land and people can produce 1 unit of corn or 1 unit of rice with each acre of land.
Quantity of rice + quantity of corn = 100 units.
The production possibilities frontier is the white line in the picture below.
After the new fertilizer is developed suppose people can produce 2 units of corn or 1 unit of rice with each acre of land.
Quantity of rice + quantity of corn × 1/2 = 100 units
The production possibilities frontier is the red line in the picture below.
Points on the production possibilities frontier represent efficient level of production. Points inside the production possibilities frontier represent inefficient level of production.
What are the two subfields into which economics is divided? Explain what each subfield studies.
The field of economics is divided into two subfields: microeconomics and macroeconomics. Microeconomists study decision making by households and firms and the interaction among households and firms in the marketplace. Macroeconomists study the forces and trends that affect the economy as a whole.
What is the difference between a positive and a normative statement? Give an example of each.
A positive statement is an assertion about how the world is while a normative statement is an assertion about how the world ought to be.
A POSITIVE STATEMENT: Policymakers face trade-offs between efficiency and equity.
A NORMATIVE STATEMENT: Policymaker should sacrifice equity for efficiency.
What is the Council of Economic Advisers?
The Council of Economic Advisers, an agency within the Executive Office of the President, is charged with offering the President objective economic advice on the formulation of both domestic and international economic policy. The Council bases its recommendations and analysis on economic research and empirical evidence, using the best data available to support the President in setting our nation's economic policy.
The Council is currently comprised of a Chairman and two Members. The Chairman is Jason Furman. The Council's members are Betsey Stevenson and Jim Stock. The Council is supported by a staff of professional senior economists, staff economists and research assistants, as well as a statistical office.
Economists who advise policymakers offer conflicting advice either because of differences in scientific judgments or because of differences in values.