Interactive Ch 01 Ten Principles of Economics 9e kuliah pertama.pptx

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1. 1 Ten Principles of Economics CHAPTER 1 N. GREGORY MANKIW PRINCIPLES OF ECONOMICS NINTH EDITION © 2021 Cengage Learning ® . May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.

2. What kinds of questions does economics address? What are the principles of how people make decisions? What are the principles of how people interact? What are the principles of how the economy as a whole works? 2 IN THIS CHAPTER © 2021 Cengage Learning ® . May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.

3. Ten Principles of Economics Resources are scarce Scarcity: the limited nature of society’s resources Society has limited resources and cannot produce all the goods and services people wish to have. Economics The study of how society manages its scarce resources 3 © 2021 Cengage Learning ® . May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.

4. Ten Principles of Economics Economists study: How people decide how much they work, what they buy, how much they save, and how they invest their savings How firms decide how much to produce and how many workers to hire How society decides how to divide its resources between national defense, consumer goods, protecting the environment, and other needs 4 © 2021 Cengage Learning ® . May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.

5. How People Make Decisions Principle 1: People face trade-offs Principle 2: The cost of something is what you give up to get it Principle 3: Rational people think at the margin Principle 4: People respond to incentives 5 © 2021 Cengage Learning ® . May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.

6. Principle 1: People Face Trade-Offs To get something that we like, we have to give up something else that we also like. Going to a party the night before an exam Less time for studying Having more money to buy stuff Working longer hours, less time for leisure Protecting the environment Resources could be used to produce consumer goods. 6 © 2021 Cengage Learning ® . May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.

7. EXAMPLE 1A: Society faces trade-offs 7 The more it spends on national defense (guns) to protect from foreign aggressors The less it can spend on consumer goods (butter) to raise its standard of living Pollution regulations: cleaner environment and improved health But at the cost of reducing the well-being of the firms’ owners, workers, and customers © 2021 Cengage Learning ® . May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.

8. EXAMPLE 1B: Society faces trade-offs Efficiency: S ociety gets the maximum benefits from its scarce resources. Equality: Prosperity is distributed uniformly among society’s members. 8 Trade-off: To achieve greater equality, we could redistribute income from wealthy to poor. But this reduces incentive to work and produce, shrinking the size of economic “pie”. © 2021 Cengage Learning ® . May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.

9. Principle 2: The Cost of Something Is What You Give Up to Get It Making decisions: Compare costs with benefits of alternatives Need to include opportunity costs Opportunity cost Whatever must be given up to obtain some item 9 © 2021 Cengage Learning ® . May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.

10. EXAMPLE 2: Opportunity cost 10 What is the opportunity cost of going to college for a year? Tuition, books, and fees NOT: room and board PLUS foregone earnings What is the opportunity cost of going to the movies? The price of the movie ticket PLUS the value of the time you spend in the theater © 2021 Cengage Learning ® . May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.

11. Principle 3: Rational People Think at the Margin Rational people Systematically and purposefully do the best they can to achieve their objectives given the available opportunities Make decisions by evaluating costs and benefits of marginal changes Small incremental adjustments to a plan of action 11 © 2021 Cengage Learning ® . May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.

12. Active Learning 1: Thinking at the margin As the manager at the local Save-a-lot, you are thinking of hiring one more cashier that would increase sales revenues by $400 per week. The new cashier would earn $300 per week. Should you hire the new cashier? Why? You pay $12/month for access to Netflix, regardless of how many movies or TV shows you watch in a month. Should you watch one more movie (or episode)? Why? 12 © 2021 Cengage Learning ® . May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.

13. Active Learning 1: Answers, A Manager at the local Save-a-lot: Marginal benefit of hiring one more cashier: Sales would increase by $400 per week. Marginal cost of hiring one more cashier: The new cashier would earn $300. Decision: Because the marginal benefit exceeds the marginal cost, the manager should hire the additional cashier 13 © 2021 Cengage Learning ® . May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.

14. Active Learning 1: Answers B B. Netflix: Marginal benefit of watching one more movie: The enjoyment you get from watching the movie Marginal cost of hiring one more cashier: Monetary cost = $0 Opportunity cost of time Decision: If the marginal benefit exceeds the marginal cost, watch the movie. 14 © 2021 Cengage Learning ® . May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.

15. Principle 4: People Respond to Incentives Incentive Something that induces a person to act Can have unintended consequences People respond to incentives Because rational people make decisions by comparing costs and benefits An increase in the price of doughnuts: Consumers buy fewer doughnuts. Sellers produce more doughnuts. 15 © 2021 Cengage Learning ® . May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.

16. EXAMPLE 3: Incentives The government increases the gasoline tax by $1 per gallon. How do consumers respond? 16 Drive smaller or more fuel-efficient cars Carpool Use public transportation Move closer to work How do businesses respond? © 2021 Cengage Learning ® . May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.

17. Active Learning 2: Applying the principles You are selling your black 1967 Chevy Impala. You have already spent $2,000 on repairs. At the last minute, the transmission dies. You can pay $1,400 to have it repaired, or sell the car “as is.” In each of the following scenarios, should you have the transmission repaired? Explain. Blue book value (what you could get for the car) is $14,500 if transmission works, $11,200 if it doesn’t. Blue book value is $12,300 if transmission works, $11,000 if it doesn’t. 17 © 2021 Cengage Learning ® . May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.

18. Active Learning 2: Answers Cost of fixing the transmission = $1,400 A. Blue book value is $14,500 if transmission works, $11,200 if it doesn’t. Benefit of fixing transmission = $3,300 (= 14,500 – 11,200) Get the transmission fixed. B. Blue book value is $12,300 if transmission works, $11,000 if it doesn’t. Benefit of fixing the transmission = $1,300 (= 12,300 – 11,000) Do not pay $1,400 to fix it. 18 © 2021 Cengage Learning ® . May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.

19. How People Interact Principle 5: Trade can make everyone better off. Principle 6: Markets are usually a good way to organize economic activity. Principle 7: Governments can sometimes improve market outcomes. 19 © 2021 Cengage Learning ® . May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.

20. Principle 5: Trade Can Make Everyone Better Off People benefit from trade: People can buy a greater variety of goods and services at lower cost. Countries benefit from trade: Allows countries to specialize in what they do best Enjoy a greater variety of goods and services 20 © 2021 Cengage Learning ® . May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.

21. Principle 6: Markets Are Usually a Good Way to Organize Economic Activity – 1 Market A group of buyers and sellers (need not be in a single location) “Organize economic activity” means determining What goods and services to produce How to produce these goods and services How to allocate them to their final user 21 © 2021 Cengage Learning ® . May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.

22. Principle 6: Markets Are Usually a Good Way to Organize Economic Activity – 2 Market economy Allocates resources through the decentralized decisions of many firms and households as they interact in markets Proven remarkably successful in organizing economic activity to promote overall prosperity 22 © 2021 Cengage Learning ® . May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.

23. Principle 6: Markets Are Usually a Good Way to Organize Economic Activity – 3 Prices: Determined by the interaction of buyers and sellers Reflect the good’s value to buyers Reflect the cost of producing the good Adam Smith’s “invisible hand”: Prices guide self-interested households and firms to make decisions that maximize society’s economic well-being. 23 © 2021 Cengage Learning ® . May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.

24. Principle 7: Governments Can Sometimes Improve Market Outcomes – 1 Government: enforce property rights Enforce rules and maintain institutions that are key to a market economy People are less inclined to work, produce, invest, or purchase if there is a large risk of their property being stolen. We rely on government-provided police and courts to enforce our rights over the things we produce. 24 © 2021 Cengage Learning ® . May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.

25. Principle 7: Governments Can Sometimes Improve Market Outcomes – 2 Government: promote efficiency Avoid market failures : Market left on its own fails to allocate resources efficiently. Externality – source of market failure Production or consumption of a good affects bystanders (e.g. pollution). Market power – source of market failure A single buyer or seller has substantial influence on market price (e.g., monopoly). 25 © 2021 Cengage Learning ® . May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.

26. Principle 7: Governments Can Sometimes Improve Market Outcomes – 3 Government: promote equality Avoid disparities in economic well-being Use tax or welfare policies to change how the economic “pie” is divided. To say that the government can improve market outcomes Does not mean that it always will 26 © 2021 Cengage Learning ® . May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.

27. Active Learning 3: The government In each of the following situations, what is the government’s role? Does the government’s intervention improve the outcome? Public schools for K-12 Workplace safety regulations Public highways Patent laws, which allow drug companies to charge high prices for life-saving drugs 27 © 2021 Cengage Learning ® . May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.

28. How the economy as a whole works Principle 8: A country’s standard of living depends on its ability to produce goods and services. Principle 9: Prices rise when the government prints too much money. Principle 10: Society faces a short-run trade-off between inflation and unemployment. 28 © 2021 Cengage Learning ® . May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.

29. Principle 8: Country’s Standard of Living Depends on Its Ability to Produce Goods and Services – 1 Huge variation in living standards across countries and over time 2017 average income: $60,000 in the U.S.; $6,000 in Nigeria Average income in rich countries Is more than ten times average income in poor countries The U.S. standard of living today Is about eight times greater than 100 years ago 29 © 2021 Cengage Learning ® . May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.

30. Principle 8: Country’s Standard of Living Depends on Its Ability to Produce Goods and Services – 2 Productivity: most important determinant of living standards Quantity of goods and services produced from each unit of labor input Depends on the equipment, skills, and technology available to workers Other factors (e.g., labor unions, competition from abroad) have far less impact on living standards. 30 © 2021 Cengage Learning ® . May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.

31. Principle 9: Prices Rise When the Government Prints Too Much Money Inflation An increase in the overall level of prices in the economy In the long run Inflation is almost always caused by excessive growth in the quantity of money, which causes the value of money to fall The faster the government creates money, the greater the inflation rate 31 © 2021 Cengage Learning ® . May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.

32. Principle 10: Society Faces a Short-Run Trade-Off between Inflation and Unemployment Short-run trade-off between inflation and unemployment In the short-run, many economic policies push inflation and unemployment in opposite directions. Other factors can make this trade-off more or less favorable, but the trade-off is always present. 32 © 2021 Cengage Learning ® . May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.

33. THINK-PAIR-SHARE Your university decides to reduce the price of a parking permit on campus from $250 per semester to $10 per semester. The number of students desiring to park their cars on campus will _________. The amount of time it would take to find a parking place will ___________. Will the lower price of a parking permit necessarily lower the true cost of parking? (Hint: opportunity cost) Would the opportunity cost of parking be the same for students with no outside employment and students with jobs earning $15 per hour?  33

34. Individual decision making: People face trade-offs among alternative goals. The cost of any action is measured in terms of forgone opportunities. Rational people make decisions by comparing marginal costs and marginal benefits. People change their behavior in response to the incentives they face. 34 CHAPTER IN A NUTSHELL © 2021 Cengage Learning ® . May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.

35. Interactions among people: Trade and interdependence can be mutually beneficial. Markets are usually a good way of coordinating economic activity among people. Governments can potentially improve market outcomes by remedying a market failure or by promoting greater economic equality. 35 CHAPTER IN A NUTSHELL © 2021 Cengage Learning ® . May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.

36. The economy as a whole: Productivity is the ultimate source of living standards. Growth in the quantity of money is the ultimate source of inflation. Society faces a short-run trade-off between inflation and unemployment. 36 CHAPTER IN A NUTSHELL © 2021 Cengage Learning ® . May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.

37. 37 Thinking Like an Economist CHAPTER 2 N. GREGORY MANKIW PRINCIPLES OF ECONOMICS NINTH EDITION

38. What are economists’ two roles? How do they differ? What are models? How do economists use them? What are the elements of the Circular-Flow Diagram? What concepts does the diagram illustrate? How is the Production Possibilities Frontier related to opportunity cost? What other concepts does it illustrate? What is the difference between microeconomics and macroeconomics? Between positive and normative? 38 IN THIS CHAPTER

39. The Economist as a Scientist – 1 Economists play two roles: Scientists: try to explain the world Policy advisors: try to improve it As scientists, economists employ the scientific method. Dispassionate development and testing of theories about how the world works Devise theories, collect data, and analyze these data to verify or refute their theories 39

40. The Economist as a Scientist – 2 Economists make assumptions. Simplify the complex world and make it easier to understand. For example, to study international trade, assume only two countries producing two goods Economists use models to study economic issues. Simplified representation of a more complicated reality 40

41. The Circular-Flow Diagram Circular-flow diagram Visual model of the economy Shows how dollars flow through markets among households and firms Two decision makers Firms and households Interacting in two markets Market for goods and services Market for factors of production (inputs) 41

42. The circular flow – 1 42 Households : Own the factors of production, sell/rent them to firms for income Buy and consume goods and services Households Firms Firms : Buy/hire factors of production, use them to produce goods and services Sell goods and services

43. The circular flow – 2 43 Goods and services are bought and sold. Sellers: firms Buyers: households Inputs are bought and sold. Sellers: households Buyers: firms Markets for Factors of Production Markets for Goods and Services

44. The circular flow – 3 44 Markets for Factors of Production Households Firms Income Wages, rent, profit Factors of production Labor, land, capital Spending G & S bought G & S sold Revenue Markets for Goods & Services

45. The PPF Production possibilities frontier (PPF) A graph that shows various combinations of outputs that the economy can possibly produce, given the available factors of production and the available production technology. 45

46. EXAMPLE 1: The PPF Assume the following: A country produces only two goods: airplanes and soybeans. It has a fixed amount of resources (labor). And it has a fixed amount and quality of technology. The available resources and technology can be used to produce: Only soybeans (5,000 tons) Only airplanes (100 airplanes) Or a combination of soybeans and airplanes 46

47. EXAMPLE 1: The PPF and output combinations 47 These are just a few of the possible production combinations. To increase the production of airplanes from 0 to 20, how many tons of soybeans do we have to give up? Airplanes Tons of Soybeans A 5,000 B 20 3,000 C 50 2,500 D 80 1,000 E 100

48. EXAMPLE 1: Drawing the PPF 48 Efficient: the economy is getting all it can from the scarce resources available – points on the PPF (A, B, C, D, E) Inefficient levels of production: points inside the PPF Not feasible: points outside the PPF Airplanes Tons of Soybeans A 5,000 B 20 4,000 C 50 2,500 D 80 1,000 E 100 Soybeans (tons) Airplanes E 100 80 D 1,000 C 50 2,500 B 20 4,000 A 5,000

49. Active Learning 1: Points off the PPF Use the graph from the previous example. Would it be possible for the economy to produce the following combinations of the two goods? Point F: 80 airplanes and 4,000 tons of soybeans Point G: 30 airplanes and 2,500 tons of soybeans 49

50. Active Learning 1: Answers 50 Point F (80 airplanes, 4,000 tons of soybeans): Not possible Point G (30 airplanes, 2,500 tons of soybeans): Possible but not efficient (can produce more) Soybeans (tons) Airplanes E 100 80 D 1,000 C 50 2,500 B 20 4,000 A 5,000 G 30 F

51. The PPF: What We Know So Far Points on the PPF (like A – E): efficient Efficient: all resources are fully utilized Points under the PPF (like G): possible Not efficient: some resources are underutilized (e.g., workers unemployed, factories idle) Points above the PPF (like F) Not possible 51

52. Moving Along the PPF Moving along a PPF Involves shifting resources from the production of one good to the other Society faces a tradeoff. Getting more of one good requires sacrificing some of the other. The slope of the PPF The opportunity cost of one good in terms of the other 52

53. EXAMPLE 2: The PPF and opportunity cost To produce the first 1,000 tons of soybeans: give up 20 airplanes Opportunity cost of 1 airplane = ______ Opportunity cost of 1 ton of soybeans = _______ 53 Soybeans (tons) Airplanes E 100 80 D 1,000 C 50 2,500 B 20 4,000 A 5,000

54. Soybeans (tons) Airplanes 100 5,000 80 1,000 50 2,500 20 4,000 Economic growth and the PPF 54 With additional resources or an improvement in technology, the economy can produce: Economic growth shifts the PPF outward. 6,000 120 more soybeans, more airplanes, or any combination in between.

55. The Shape of the PPF Shape of the PPF Straight line: constant opportunity cost Previous example: the opportunity cost of 1 airplane is 50 tons of soybeans Bowed outward: increasing opportunity cost As more units of a good are produced, we need to give up increasing amounts of the other good produced. 55

56. Why the PPF might be bowed outward – 1 56 As the economy shifts resources from beer to mountain bikes: Mountain Bikes Beer PPF becomes steeper and the opportunity cost of mountain bikes increases.

57. Why the PPF might be bowed outward – 2 57 At point A, most workers are producing beer, even those who are better suited to building bikes. At B, most workers are producing bikes. The few left in beer production are the best brewers. Mountain Bikes Beer A B At B , opportunity cost of mountain bikes is high. At A , opportunity cost of mountain bikes is low.

58. Why the PPF Might Be Bowed Outward The PPF is bowed outward when: Different workers have different skills There are different opportunity costs of producing one good in terms of the other There is some other resource, or mix of resources, with varying opportunity costs E.g., different types of land suited for different uses 58

59. Micro- and Macroeconomics Microeconomics The study of how households and firms make decisions and how they interact in markets Macroeconomics The study of economy-wide phenomena, including inflation, unemployment, and economic growth 59

60. The Economist as Policy Adviser Positive statements: descriptive Attempt to describe the world as it is Confirm or refute by examining evidence: “Minimum-wage laws cause unemployment.” Normative statements: prescriptive Attempt to prescribe how the world should be: “The government should raise the minimum wage.” 60

61. Active Learning 2: Positive or normative? Which of these statements are “positive” and which are “normative”? How can you tell the difference? Prices rise when the government increases the quantity of money. The government should print less money. A tax cut is needed to stimulate the economy. An increase in the price of burritos will cause an increase in consumer demand for movie streaming. 61

62. Active Learning 2: Answers Prices rise when the government increases the quantity of money. Positive—describes a relationship, could use data to confirm or refute. The government should print less money. Normative—this is a value judgment; cannot be confirmed or refuted. A tax cut is needed to stimulate the economy. Normative—another value judgment. An increase in the price of burritos will cause an increase in consumer demand for movie streaming. Positive—describes a relationship. Note: A statement need not be true to be positive. 62

63. Economists in Washington – 1 Council of Economic Advisers Advises the president Writes the annual Economic Report of the President Office of Management and Budget Helps formulate spending plans and regulatory policies Department of the Treasury Designs tax policy 63

64. Economists in Washington – 2 Department of Labor Analyzes data on workers and those looking for work Formulates labor-market policies Economists at the Department of Justice Enforce the nation’s antitrust laws Congressional Budget Office Helps the Congress The Federal Reserve Sets monetary policy 64

65. Why Economists’ Advice Is Not Always Followed The president receives advice from: Economists Communication advisers Press advisers Legislative affairs advisers Political advisers The president makes the decision. 65

66. Why Economists Disagree Economists often give conflicting policy advice: Can disagree about the validity of alternative positive theories about the world May have different values and, therefore, different normative views about what policy should try to accomplish Yet, there are many propositions about which most economists agree. 66

67. ASK THE EXPERTS 67 Ticket Resale “Laws that limit the resale of tickets for entertainment and sports events make potential audience members for those events worse off on average.” Source: IGM Economic Experts Panel, April 16, 2012.

68. Propositions about which most economists agree – 1 68 A ceiling on rents reduces the quantity and quality of housing available. (93%) Tariffs and import quotas usually reduce general economic welfare. (93%) The United States should not restrict employers from outsourcing work to foreign countries. (90%) The United States should eliminate agricultural subsidies. (85%) Local and state governments should eliminate subsidies to professional sports franchises. (85%)

69. Propositions about which most economists agree – 2 69 Cash payments increase the welfare of recipients to a greater degree than do transfers in-kind of equal cash value. (84%) A large federal budget deficit has an adverse effect on the economy. (83%) The United States should not ban genetically modified crops. (82%) A minimum wage increases unemployment among young and unskilled workers. (79%) Government subsidies on ethanol in the United States should be reduced or eliminated. (78%)

70. THINK-PAIR-SHARE – 1 You are watching PBS NewsHour . The first focus segment is a discussion of the pros and cons of free trade. For balance, there are two economists present—one in support of free trade and one opposed. Your roommate says, “Those economists have no idea what’s going on. They can’t agree on anything. One says free trade makes us rich. The other says it will drive us into poverty. If the experts don’t know, how is the average person ever going to know whether free trade is best?” 70

71. THINK-PAIR-SHARE – 2 Can you give your roommate any insight into why economists might disagree on this issue? Suppose you discover that 93 percent of economists believe that free trade is generally best (which is the greatest agreement on any single issue). Could you now give a more precise answer as to why economists might disagree on this issue?  What if you later discovered that the economist opposed to free trade worked for a labor union. Would that help you explain why there appears to be a difference of opinion on this issue?  71

72. Economists are scientists. Make appropriate assumptions and build simplified models Use the circular-flow diagram and the production possibilities frontier Microeconomists study decision making by households and firms and their interactions in the marketplace. Macroeconomists study the forces and trends that affect the economy as a whole. 72 CHAPTER IN A NUTSHELL

73. A positive statement is an assertion about how the world is. A normative statement is an assertion about how the world ought to be. As policy advisers, economists make normative statements. Economists sometimes offer conflicting advice. Differences in scientific judgments Differences in values 73 CHAPTER IN A NUTSHELL