Chapter 2: Thinking Like an Economist

Economics as a Science Use of scientific method Problems with this for economists?

Assumptions Need to simplify models by using assumptions about economic world

Economic Models First two we use: Circular Flow Production Possibilities Frontier (PPF)

Circular-Flow Diagram Explains how participants in economy interact with one another Shows two things: Outside circle shows flow of dollars Inside circle shows flow of inputs & outputs Also shows market for goods & services as well as market for factors of production

Production Possibilities Frontier Shows combinations of output that the economy can possibly produce

Efficient vs. Inefficient Points on PPF are efficient Points inside PPF are inefficient Points outside PPF are unattainable given current level of resources & technology

Other points of note PPF can be straight line (constant opp. cost) or bowed outward (changing opp. cost) PPF can shift outward if there is a change in resources and/or technology

Micro vs. Macro Microeconomics: Study of households and firms making economic decisions Macroeconomics: Study of economy-wide concepts such as inflation & unemployment

Economists as Policy Advisors Positive Statements: Attempts to describe the world as it is Normative Statements: Attempts to prescribe how the world should be

Why Economists Disagree Differences in Scientific Judgments Differences in Values What do they agree about?