Name : Muhammad Hoqqil Fatwa
NIM : 19522214
Introduction to Economics
Thinking Like an Economist
RESUME
UNDERSTANDING ECONOMIC THINKING
Thinking is the development of ideas and concepts in a person with a dynamic process, where
individuals act actively in dealing with things that are abstract. Economic thinking is human thinking
about poverty and welfare, production and distribution, expenditure and consumption, prices and
money and so on.
ECONOMS AS SCIENTISTS
Economists try to solve problems with theory, collect and analyze data as evidence, and look for
errors in their theories. The scientific method - the development and testing of objective theories
about how the world works - can be applied to study a country's economy.
THE ROLE OF ASSUMPTIONS
Economists make different assumptions in order to simplify a complex world and make it easier
to answer different questions. For example, the short-term impact of government policy changes the
amount of money in circulation, it can be assumed that prices do not change much. But for the long
term impact, it is assumed that all prices are very flexible. Thus, economists use different
assumptions when studying the short and long term impacts of policy changes in the economy.
ECONOMIC MODELS
Economists use models to study the world which is made up of diagrams and equations, but the
small parts that are actually important are often overlooked. The model used by an economist also
does not cover every part of the economy. Economists develop models to examine various economic
issues with the assumption that all the small parts of the economy are relevant in studying the
question being faced. All models in various fields of science simplify reality to increase our
understanding.
a) First Model: Circular Flow Diagrams
Circular flow diagram (Circular Flow Diagram) is a visual model of the economy that shows how
money flows into markets through households and companies. In this model, a simplified economy
includes households and companies.
The inside of the circular flow diagram illustrates the input and output flow. In factor factor markets,
households sell labor, land and capital (buildings and machinery) to companies to produce goods
and services, which are then sold to households in the goods and services market. Factors of
production flow from households to companies, goods and services flow from companies to
households.
The outside of the circular flow diagram illustrates the flow of money. Households spend money
to buy goods and services. The company uses part of its income to pay for the factors of production,
leaving the owner of the company as a member of the household. Expenditures buying goods and
services flow from households to companies, and income (salaries, rents, profits) flow from
companies to households, so that the circular flow in the economy can recur. A more complex and
realistic circular flow model will include the roles of government and international trade.
b) Second Model: Limit of Production Possibilities
Most economic models are built using mathematical tools. The Production Possibility Frontier
model is a graph of the combination of results that an economy can produce with the available
factors of production and technology. For example, the car industry and the computer industry
together use all factors of production. If all resources are used in the car industry, the economy will
produce 1000 units of cars without computers. And if all resources are used in the computer
industry, the economy will produce 3,000 units of computers without cars. Whereas if all resources
are shared between the two industries, the economy can produce 700 cars and 2000 computers
(point A).
Results at point D are not possible because the resources are lacking. The economy only
produces at any point at or within the limits of possible production, not at any point outside that
limit. The points at the production possibilities (point A) represent the efficient level of production.
That is, the economy does not produce a greater number of goods without reducing the amount of
production of other goods.
Points within the possibility of production (point B) represent inefficient results because the
economy does not get anything from the maximum available resources. That is, the economy
produces less than its ability from available resources. If the source of inefficiency is removed, the
economy can move from point B to point A.
MICRO AND MACRO ECONOMIC
Economics is divided into 2 subfields, namely microeconomics (Microeconomics) and
macroeconomics (Macroeconomics). Microeconomics studies how households and companies make
decisions and interact in markets, while macroeconomics studies broad economic phenomena,
including inflation, unemployment and economic growth. Macroeconomic development is
impossible to understand without considering related microeconomic decisions. For example, macro
economists must consider the effect of income tax cuts on goods and services on household
decisions in spending money to buy these goods and services. However, micro and macro economics
discuss problems and require different approaches.
POSITIVE ANALYSIS VS NORMATIVE ANALYSIS
There are two types of statements about the world, namely Positive Statements which describe
the real world and Normative Statements, which talk about how the world should be. Economists
evaluate positive statements by analyzing data and evaluating.
normative statements involving data, values, and facts.
A positive statement about how the world works influences.
normative statements about policies that involve consideration of values.
Economics explains how the economy works and also improves the way the economy works.
When economists make normative statements, they become policy advisers.
WHY ECONOMIST NEVER CONCUR
Economists often draw criticism for giving conflicting advice to policy makers for two basic reasons,
namely:
• Economists may disagree on the validity of alternative positive theories about how the world
works
• Economists may have different normative values and views about the policies that should be
implemented.
PERCEPTION VERSUS REALITY
Because of differences in scientific judgments and values, some differences of opinion among
economists are inevitable. However, we cannot exaggerate differences of opinion. In many cases,
economists give a uniform view. In a survey of economists in the business, government and
academic world. The first argument is about controlling rent costs. Nearly all economists believe that
controlling rental costs adversely affects the availability and quality of housing, and is an extremely
costly way of helping members of the community most in need. However, many municipalities
choose to ignore the economists' advice and place a high limit on rental costs so that the owners of
rental houses charge them to their tenants. Dali second is about tariffs and import quotas, two
policies that limit international trade. Almost all economists oppose restrictions on free trade.
However, over the years, the President and Congress have chosen to limit the import of certain
goods. In 2002, for example, the President Bush administration imposed high tariffs on steel to
protect domestic steel producers from foreign competition. In this case, economists provide uniform
advice, but policy makers choose to ignore it. Why do policies such as controlling rental costs and
restrictions on trade continue when experts unite against it? the reason could be because
economists have not convinced the general public that these policies are desirable.
