Economics influences decision-making on important issues that may seem remote from economics (pollution, health care, education, social issues, energy). Economists have a say in determining the amount of pollution that will occur, in deciding how patients will be treated in hospitals, in suggesting the appropriate energy, educational and social policies for the nation to follow. Those of you who are not economics majors should expect economics to interact with the subject that is your major. And it will help you understand material in which you are more interested.
These are the most important s in the textbook, all of which will be picked up and discussed in greater detail in later chapters. All of the s are in the combined text, and several are excluded in each of the microeconomics and macroeconomics texts.
1: How much does it really cost?
Opportunity cost is the value of the best forgone alternative to any decision. We use the term opportunity cost to emphasize that choice involves a tradeoff - we give up something to get something else - and the highest-valued alternative we give up is the opportunity cost of the activity we choose.
All actions involve opportunity costs. Whatever we choose to do, we could have done something else instead. There is no such a thing as a "free ride". The central in economics expresses just that: every choice involves a cost.
Opportunity cost expresses the true economic cost. To make a rational decision, the opportunity cost of the action must be measured because only such a calculation will tell us what was given up.
2: Interfering with the Laws of Supply and Demand - The Market Strikes Back
Markets set prices. As we'll learn in Chapter 5, prices tend to rise when a good is in short supply and tend to fall when its supply is abundant. This simply tells us that the market functions efficiently and tries to allocate scarce resources in the activities in which they are most valued.
The government may intervene. Buyers never like it when prices rise. But sellers love it. And sellers never like it when prices fall. But buyers are happy. Government intervention takes the form of the imposition of price ceilings (so that prices will remain artificially low) or price floors (so that prices remain artificially high).
The market may "strike back". This form of government intervention usually results to market distortions and misallocation of resources. The usual outcome of a price ceiling is supply shortage and "black market" effects. On the other hand, price floors result to supply surpluses.
3: The Surprising Principle of Comparative Advantage
When two nations trade, both benefit. This holds true even if one is more efficient in producing everything.
The Principle of Comparative Advantage. A person (or a nation) has a comparative advantage in the production of a good or service if he (it) can produce the good or service at a lower opportunity cost than everyone else can.
Specialization. People and nations gain by specializing in the activity in which they have a compartive advantage and trading with the others.
4: Trade is a Win-Win Situation
Trade benefits both buyers and sellers. People engage in voluntary exchange only if they expect the exchange to make them better off, so everyone gains from voluntary exchange. Most exchange in our economy takes place in markets which are efficient in the sence that they send resources to the place where they are most highly valued.
Restrictions on trade reduces benefits. Sometimes, legal restrictions block the mutual benefits arising from voluntary exchange.
5: The Importance of Thinking at the Margin
Marginal means small change. Choices are made in small steps, or at the margin. Everything that we do involves a decision to do a little bit more or a little bit less of an activity.
Marginal cost and marginal benefit. The marginal cost of an activity is the extra cost from making a small change and the activity's marginal benefit is the extra benefit from the small change.
Rational decisions involve the comparison of costs and benefits at the margin. Marginal analysis compares the marginal cost and benefit of an activity. It explains how people make decisions. If the marginal benefit exceeds the marginal cost, it is logical to undertake that activity. The opposite holds true if the marginal benefit is short of the marginal cost.
6. Externalities: A Shortcoming of the Market Cured by Market Methods
Externalities are the effects of transactions on third parties. A cigarette smoker blows smoke to your face. The utility company that supplies electricity to your home also produces soot that discolors your curtains and pollutants that despoil the air and even affect your health. Externalities are social costs because, in the majority of cases, affect society as a whole.
Externalities cause market failure which in turn needs government intervention. This defect of the market can be remedies by the use of market-oriented policies.
7: Why the Costs of Education and Medical Care Keep Growing
Productivity in manufacturing is higher than productivity in services. Technological improvements have made private manufacturing industries more efficient.
Wage growth is similar in both sectors. Higher wages in the manufacturing sector, as a result of increased productivity, cause an increase in wages in the services sector.
8: The Tradeoff Between Efficiency and Equality
More efficiency means more output and jobs. The more efficient an economy is the more output it produces and the more jobs it creates.
More equality means less efficiency. The greater the equality of wages and incomes the less efficient the economy is because scarce resources are put into less productive uses.
Labor markets distribute income efficiently, not equally. Skilled and productive labor will enjoy higher wages and salaries than unskilled and unproductive labor.
9: The Short-Run Tradeoff Between Inflation and Unemployment.
Low unemployment causes prices to rise and high unemployment brings about a fall in prices. Most government policies that reduce inflation are likely to intensify the unemployment problem and vice versa.
10: Inflation Distorts Measurements.
Prices measure values. The dollar, or any other currency, measures the value of the goods and services we buy. In the presence of inflation, such measurements are not correct.
Prices tend to rise over time. Average consumer prices have increased about 700% over the past 50 years.
To compare values at different times, we must adjust prices for the impact of inflation. Comparison of prices over time will be correct only if we use methods that account for inflation.
11: Why Was Important to Reduce the Budget Deficit?
Government borrowing brings about an increase in interest rates. Sustaining a large budget deficit requires high interest rates which in turn attract the necessary money funds to finance the deficit.
Government expenditure cuts and tax increases lower or eliminate the budget deficit. Less government spending means less fund outflows on the expenditure side while, at the same time, higher taxes mean more fund inflows on the revue side. The end result, depending on the magnitude of fund inflows and outflows, would ne a smaller budget deficit or a budget surplus.
Lowering the deficit is difficult but necessary. There is no clearcut answer as to the economic effects of large budget deficits. However, a very large budget deficit cannot be sustained for ever and has to be lowered or eliminated depending on the state of the economy.
12: Productivity Growth is (Almost) Everything in the Long Run
Productivity growth results to more output. An increase in the output per hour of work will increase output and bring about higher living standards.
In the long run, productivity growth is (almost) everything. A small increase in productivity growth will have a comparatively much larger effect on a country's standard of living over a long time period because of the compounding element of productivity.
Inside an Economist's Toolkit
Economics as a Discipline
Economics is the most scientific of the social sciences and it is much more social than the natural sciences.
Economics is divided into two main areas: microeconomics and macroeconomics.
Microeconomics studies the decisions of individual households and firms, the functioning of individual markets and how markets are affected by taxes and other regulations.
Macroeconomics examines national and international economies. It studies how the overall level of economic activity is determined and how government intervention affects the economy as a whole.
Economics as a Science
Economic science attempts to understand the economic world. All sciences are careful to distinguish between what is and what ought to be.
Positive statements describe how the world actually is. Positive statements, assertions or theories may be simple or complex, but they are basically matters of fact. Disagreement over positive statements are appropriately handled by an appeal to the facts. The statement "It is impossible to break up atoms" is a positive statement because it can be tested with the help of sufficient empirical data.
Normative statements tell what the world should be. Because they are concerned with "what ought to be", they are bound up with philosophical, cultural and religious issues. A normative statement is one that makes, or is based on, a value judgement. Disagreement over normative statements cannot be handled by an appeal to the facts. The statement "Scientists ought not to break up atoms" is a normative statement because it involves ethical judgement, You may agree with or disagree with statement but you cannot test it.
Economists are concerned with the derivation of economic principles or theories which are useful in the formulation of policies designed to solve economic problems. The procedure employed by economists is summarized in Figure 1 below:
Figure 1
The economist must first ascertain and gather the facts which are relevant to consideration of a specific economic problem. In other words, he must observe and measure the relevant economic variables. The economist then puts his facts in order and summarizes them by generalizing about the way individuals and institutions actually behave. Deriving principles from facts is called economic theory or economic analysis. Finally, the general knowledge of economic behaviour which economic theory provides can then be used in formulating policies for correcting or avoiding the specific economic problem. This is called applied economics or policy economics. In the latter field, value judgements come into the picture. Observation and measurement of economic variables as well as economic theory are both concerned with facts. Policy economics, on the other hand, necessarily entails value judgements regarding the desirability of certain events. At this level, the economist no longer functions as a scientist but as a policy maker. He deals not only with facts but also with values.
Abstractions
Real world complexity necessitates simplification in economic theory. The "art" of economics is to focus on the essential and ignore the trivial. Economic theory is necessarily an abstraction. If it were not, it would merely dublicate the world and would add nothing to our understanding. The very process of sorting out noneconomic and irrelevant facts in the fact-gathering process involves abstracting from reality. Economists theorize in order to give meaning to a maze of facts which would otherwise be confusing and useless and to put facts into a more usable practical form. It is not correct to assume that theory is impractical and unrealistic because it its abstract. On the contrary, economic theory is practical because it is abstract since reality is too complex to be meaningful.
Economic theories are generalizations and, therefore, subject to exceptions and to quantitatively imprecise statements. Economic facts are usually diverse because not all individuals act alike. Thus, economic theories are frequently stated in terms of averages or statistical probabilities. For example, when economists say that the Consumer Price Index (CPI) increased by 4%, they are making a generalization. It is recognized that the prices of some goods and services went up, the prices of others went down or, yet, the prices of others remained constant. The main reason for such generalizations is that the economist cannot conduct controlled experiments the same way a chemist does in a laboratory. Economics, like other social sciences, deals with human behaviour which cannot be isolated or predicted.
Economic theory
When a relation between two or more things is observed, we may ask why this should be so. A theory is an attempt to answer this question and, by providing an explanation for this relation, it enables us to predict as yet unobserved events. For example, national income theory predicts that private consumption will increase if income increases. Theories are used in explaining observed phenomena. A successful theory enables us to predict behaviour. Any explanation of how given observations are linked together is a theoretical construction. Theory is used to impose order on our observations, to explain how what we see is linked together.
The interaction between facts and economic theory in Figure 1 is oversimplified. Economic theory is a meaningful statement drawn from facts, but facts serve as a constant check on the validity of theories already established. Facts change with time and this makes it essential that the theory should be subjected to continued scrutiny.
A theory consists of:
a set of definitions clearly defining the variables to be used
a set of assumptions that outline the conditions under which the theory is to apply
one or more hypotheses regarding the relationships among the variables
predictions that are deducted from the assumptions of the theory and can be tested against actual empirical evidence.
Economic Models
An economic model is a simplified picture or map of some segment of the economy. It enables us to better understand reality because it avoids the details of reality. A model must contain assumptions about what is important and what can be ignored.
In developing economic models, the ceteris paribus (Latin for "other things equal") assumption is used to concentrate on the effect from a single variable in isolation from all others. To illustrate: In analyzing the relationship between the price of a good A and the amount of A purchased, economists assume that of all the other factors influencing the quantity of A purchased, only its price varies. To cut the problem down to size, they must assume that all other factors which might influence the quantity of A purchased are unchanged or constant. In this way, they can isolate the relationship between price and quantity demanded from all kinds of real-world complications.
Economic models may take the form of verbal description, numerical tables, mathematical equations or graphs. The latter are particularly helpful and will be used throughout the course. We'll discuss graphs in Chapter 2.
Pitfalls in Economics
Two pitfalls can occur in the construction of economic theories:
The fallacy of composition is the false assertion that what is true for the individual or part must be true for the whole or, alternatively, what is true for the whole must be true for the individual or part. The validity of a particular generalization for an individual or part does not necessarily ensure its accuracy for the group or whole.
You are watching a basketball game and, because your team is winning, you stand on your feet to get a better view. If you, as an individual, stand up, then your view of the game is improved. But does this also hold true for the whole - the other spectators? Obviously not. If everyone stands to watch the game, everybody - including yourself - will have the same or even worse view than before.
The fallacy of composition arises mainly in macroeconomics where economic units (households, businesses) are treated as if they were one unit. When idividual parts interact with each other, the outcome for the whole may be different from that intended by the individual part. To illustrate: A firm (an individual part) lays off employees in ordert to cut down on expenses and increase profits. If all firms (the whole) do the same, incomes and spending will fall. The sales fo the firm are smaller and its profits do not increase.
Post hoc fallacy. The post hoc, ergo proper hoc (Latin for "after this, therefore because of this") fallacy is the claim that one event caused another simply because the first event occured before the second.
Suppose that every automn the members of an Indian tribe perform the ritual of dancing around the fire so that it will rain. The next day, it starts raining. Can we safely conclude that event A, the rain dance, has caused event B, the rain? Day follows night, but this does not mean that night is the cause of day.
Cause and effect in economics is seldom a simple, single event. For example, empirical evidence suggests that college graduates earn higher incomes than high school graduates. But can the higher incomes of college graduates be related only to education? Or people with higher education are more intelligent, more motivated or better connected and thus would have earned more even if they were not college graduates? We can therefore see that "simple" cause-and-effect relationships may prove to be only partially correct and, as a result, misleading. To disentangle cause and effect, economists use economic models and data and perform experiments.
Disagreements among economists
Economists agree on a remarkably wide range of issues. Disagreements among economists are not necessarily scientific and very often are due to imperfect information with respect to a specific issue.
Another source of disagreements is due to value judgements. Economists offer their opinion on normative issues as well as their professional views on positive questions. Disputes arise when normative propositions appear as positive propositions.
These are the most important s in the textbook, all of which will be picked up and discussed in greater detail in later chapters. All of the s are in the combined text, and several are excluded in each of the microeconomics and macroeconomics texts.
1: How much does it really cost?
Opportunity cost is the value of the best forgone alternative to any decision. We use the term opportunity cost to emphasize that choice involves a tradeoff - we give up something to get something else - and the highest-valued alternative we give up is the opportunity cost of the activity we choose.
All actions involve opportunity costs. Whatever we choose to do, we could have done something else instead. There is no such a thing as a "free ride". The central in economics expresses just that: every choice involves a cost.
Opportunity cost expresses the true economic cost. To make a rational decision, the opportunity cost of the action must be measured because only such a calculation will tell us what was given up.
2: Interfering with the Laws of Supply and Demand - The Market Strikes Back
Markets set prices. As we'll learn in Chapter 5, prices tend to rise when a good is in short supply and tend to fall when its supply is abundant. This simply tells us that the market functions efficiently and tries to allocate scarce resources in the activities in which they are most valued.
The government may intervene. Buyers never like it when prices rise. But sellers love it. And sellers never like it when prices fall. But buyers are happy. Government intervention takes the form of the imposition of price ceilings (so that prices will remain artificially low) or price floors (so that prices remain artificially high).
The market may "strike back". This form of government intervention usually results to market distortions and misallocation of resources. The usual outcome of a price ceiling is supply shortage and "black market" effects. On the other hand, price floors result to supply surpluses.
3: The Surprising Principle of Comparative Advantage
When two nations trade, both benefit. This holds true even if one is more efficient in producing everything.
The Principle of Comparative Advantage. A person (or a nation) has a comparative advantage in the production of a good or service if he (it) can produce the good or service at a lower opportunity cost than everyone else can.
Specialization. People and nations gain by specializing in the activity in which they have a compartive advantage and trading with the others.
4: Trade is a Win-Win Situation
Trade benefits both buyers and sellers. People engage in voluntary exchange only if they expect the exchange to make them better off, so everyone gains from voluntary exchange. Most exchange in our economy takes place in markets which are efficient in the sence that they send resources to the place where they are most highly valued.
Restrictions on trade reduces benefits. Sometimes, legal restrictions block the mutual benefits arising from voluntary exchange.
5: The Importance of Thinking at the Margin
Marginal means small change. Choices are made in small steps, or at the margin. Everything that we do involves a decision to do a little bit more or a little bit less of an activity.
Marginal cost and marginal benefit. The marginal cost of an activity is the extra cost from making a small change and the activity's marginal benefit is the extra benefit from the small change.
Rational decisions involve the comparison of costs and benefits at the margin. Marginal analysis compares the marginal cost and benefit of an activity. It explains how people make decisions. If the marginal benefit exceeds the marginal cost, it is logical to undertake that activity. The opposite holds true if the marginal benefit is short of the marginal cost.
6. Externalities: A Shortcoming of the Market Cured by Market Methods
Externalities are the effects of transactions on third parties. A cigarette smoker blows smoke to your face. The utility company that supplies electricity to your home also produces soot that discolors your curtains and pollutants that despoil the air and even affect your health. Externalities are social costs because, in the majority of cases, affect society as a whole.
Externalities cause market failure which in turn needs government intervention. This defect of the market can be remedies by the use of market-oriented policies.
7: Why the Costs of Education and Medical Care Keep Growing
Productivity in manufacturing is higher than productivity in services. Technological improvements have made private manufacturing industries more efficient.
Wage growth is similar in both sectors. Higher wages in the manufacturing sector, as a result of increased productivity, cause an increase in wages in the services sector.
8: The Tradeoff Between Efficiency and Equality
More efficiency means more output and jobs. The more efficient an economy is the more output it produces and the more jobs it creates.
More equality means less efficiency. The greater the equality of wages and incomes the less efficient the economy is because scarce resources are put into less productive uses.
Labor markets distribute income efficiently, not equally. Skilled and productive labor will enjoy higher wages and salaries than unskilled and unproductive labor.
9: The Short-Run Tradeoff Between Inflation and Unemployment.
Low unemployment causes prices to rise and high unemployment brings about a fall in prices. Most government policies that reduce inflation are likely to intensify the unemployment problem and vice versa.
10: Inflation Distorts Measurements.
Prices measure values. The dollar, or any other currency, measures the value of the goods and services we buy. In the presence of inflation, such measurements are not correct.
Prices tend to rise over time. Average consumer prices have increased about 700% over the past 50 years.
To compare values at different times, we must adjust prices for the impact of inflation. Comparison of prices over time will be correct only if we use methods that account for inflation.
11: Why Was Important to Reduce the Budget Deficit?
Government borrowing brings about an increase in interest rates. Sustaining a large budget deficit requires high interest rates which in turn attract the necessary money funds to finance the deficit.
Government expenditure cuts and tax increases lower or eliminate the budget deficit. Less government spending means less fund outflows on the expenditure side while, at the same time, higher taxes mean more fund inflows on the revue side. The end result, depending on the magnitude of fund inflows and outflows, would ne a smaller budget deficit or a budget surplus.
Lowering the deficit is difficult but necessary. There is no clearcut answer as to the economic effects of large budget deficits. However, a very large budget deficit cannot be sustained for ever and has to be lowered or eliminated depending on the state of the economy.
12: Productivity Growth is (Almost) Everything in the Long Run
Productivity growth results to more output. An increase in the output per hour of work will increase output and bring about higher living standards.
In the long run, productivity growth is (almost) everything. A small increase in productivity growth will have a comparatively much larger effect on a country's standard of living over a long time period because of the compounding element of productivity.
Inside an Economist's Toolkit
Economics as a Discipline
Economics is the most scientific of the social sciences and it is much more social than the natural sciences.
Economics is divided into two main areas: microeconomics and macroeconomics.
Microeconomics studies the decisions of individual households and firms, the functioning of individual markets and how markets are affected by taxes and other regulations.
Macroeconomics examines national and international economies. It studies how the overall level of economic activity is determined and how government intervention affects the economy as a whole.
Economics as a Science
Economic science attempts to understand the economic world. All sciences are careful to distinguish between what is and what ought to be.
Positive statements describe how the world actually is. Positive statements, assertions or theories may be simple or complex, but they are basically matters of fact. Disagreement over positive statements are appropriately handled by an appeal to the facts. The statement "It is impossible to break up atoms" is a positive statement because it can be tested with the help of sufficient empirical data.
Normative statements tell what the world should be. Because they are concerned with "what ought to be", they are bound up with philosophical, cultural and religious issues. A normative statement is one that makes, or is based on, a value judgement. Disagreement over normative statements cannot be handled by an appeal to the facts. The statement "Scientists ought not to break up atoms" is a normative statement because it involves ethical judgement, You may agree with or disagree with statement but you cannot test it.
Economists are concerned with the derivation of economic principles or theories which are useful in the formulation of policies designed to solve economic problems. The procedure employed by economists is summarized in Figure 1 below:
Figure 1
The economist must first ascertain and gather the facts which are relevant to consideration of a specific economic problem. In other words, he must observe and measure the relevant economic variables. The economist then puts his facts in order and summarizes them by generalizing about the way individuals and institutions actually behave. Deriving principles from facts is called economic theory or economic analysis. Finally, the general knowledge of economic behaviour which economic theory provides can then be used in formulating policies for correcting or avoiding the specific economic problem. This is called applied economics or policy economics. In the latter field, value judgements come into the picture. Observation and measurement of economic variables as well as economic theory are both concerned with facts. Policy economics, on the other hand, necessarily entails value judgements regarding the desirability of certain events. At this level, the economist no longer functions as a scientist but as a policy maker. He deals not only with facts but also with values.
Abstractions
Real world complexity necessitates simplification in economic theory. The "art" of economics is to focus on the essential and ignore the trivial. Economic theory is necessarily an abstraction. If it were not, it would merely dublicate the world and would add nothing to our understanding. The very process of sorting out noneconomic and irrelevant facts in the fact-gathering process involves abstracting from reality. Economists theorize in order to give meaning to a maze of facts which would otherwise be confusing and useless and to put facts into a more usable practical form. It is not correct to assume that theory is impractical and unrealistic because it its abstract. On the contrary, economic theory is practical because it is abstract since reality is too complex to be meaningful.
Economic theories are generalizations and, therefore, subject to exceptions and to quantitatively imprecise statements. Economic facts are usually diverse because not all individuals act alike. Thus, economic theories are frequently stated in terms of averages or statistical probabilities. For example, when economists say that the Consumer Price Index (CPI) increased by 4%, they are making a generalization. It is recognized that the prices of some goods and services went up, the prices of others went down or, yet, the prices of others remained constant. The main reason for such generalizations is that the economist cannot conduct controlled experiments the same way a chemist does in a laboratory. Economics, like other social sciences, deals with human behaviour which cannot be isolated or predicted.
Economic theory
When a relation between two or more things is observed, we may ask why this should be so. A theory is an attempt to answer this question and, by providing an explanation for this relation, it enables us to predict as yet unobserved events. For example, national income theory predicts that private consumption will increase if income increases. Theories are used in explaining observed phenomena. A successful theory enables us to predict behaviour. Any explanation of how given observations are linked together is a theoretical construction. Theory is used to impose order on our observations, to explain how what we see is linked together.
The interaction between facts and economic theory in Figure 1 is oversimplified. Economic theory is a meaningful statement drawn from facts, but facts serve as a constant check on the validity of theories already established. Facts change with time and this makes it essential that the theory should be subjected to continued scrutiny.
A theory consists of:
a set of definitions clearly defining the variables to be used
a set of assumptions that outline the conditions under which the theory is to apply
one or more hypotheses regarding the relationships among the variables
predictions that are deducted from the assumptions of the theory and can be tested against actual empirical evidence.
Economic Models
An economic model is a simplified picture or map of some segment of the economy. It enables us to better understand reality because it avoids the details of reality. A model must contain assumptions about what is important and what can be ignored.
In developing economic models, the ceteris paribus (Latin for "other things equal") assumption is used to concentrate on the effect from a single variable in isolation from all others. To illustrate: In analyzing the relationship between the price of a good A and the amount of A purchased, economists assume that of all the other factors influencing the quantity of A purchased, only its price varies. To cut the problem down to size, they must assume that all other factors which might influence the quantity of A purchased are unchanged or constant. In this way, they can isolate the relationship between price and quantity demanded from all kinds of real-world complications.
Economic models may take the form of verbal description, numerical tables, mathematical equations or graphs. The latter are particularly helpful and will be used throughout the course. We'll discuss graphs in Chapter 2.
Pitfalls in Economics
Two pitfalls can occur in the construction of economic theories:
The fallacy of composition is the false assertion that what is true for the individual or part must be true for the whole or, alternatively, what is true for the whole must be true for the individual or part. The validity of a particular generalization for an individual or part does not necessarily ensure its accuracy for the group or whole.
You are watching a basketball game and, because your team is winning, you stand on your feet to get a better view. If you, as an individual, stand up, then your view of the game is improved. But does this also hold true for the whole - the other spectators? Obviously not. If everyone stands to watch the game, everybody - including yourself - will have the same or even worse view than before.
The fallacy of composition arises mainly in macroeconomics where economic units (households, businesses) are treated as if they were one unit. When idividual parts interact with each other, the outcome for the whole may be different from that intended by the individual part. To illustrate: A firm (an individual part) lays off employees in ordert to cut down on expenses and increase profits. If all firms (the whole) do the same, incomes and spending will fall. The sales fo the firm are smaller and its profits do not increase.
Post hoc fallacy. The post hoc, ergo proper hoc (Latin for "after this, therefore because of this") fallacy is the claim that one event caused another simply because the first event occured before the second.
Suppose that every automn the members of an Indian tribe perform the ritual of dancing around the fire so that it will rain. The next day, it starts raining. Can we safely conclude that event A, the rain dance, has caused event B, the rain? Day follows night, but this does not mean that night is the cause of day.
Cause and effect in economics is seldom a simple, single event. For example, empirical evidence suggests that college graduates earn higher incomes than high school graduates. But can the higher incomes of college graduates be related only to education? Or people with higher education are more intelligent, more motivated or better connected and thus would have earned more even if they were not college graduates? We can therefore see that "simple" cause-and-effect relationships may prove to be only partially correct and, as a result, misleading. To disentangle cause and effect, economists use economic models and data and perform experiments.
Disagreements among economists
Economists agree on a remarkably wide range of issues. Disagreements among economists are not necessarily scientific and very often are due to imperfect information with respect to a specific issue.
Another source of disagreements is due to value judgements. Economists offer their opinion on normative issues as well as their professional views on positive questions. Disputes arise when normative propositions appear as positive propositions.