1. Chapter 2: Thinking Like an Economist

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

3. Assumptions
Need to simplify models by using assumptions about economic world

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

5. 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

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

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

9. 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

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

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

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