Chapter 2: Thinking Like An Economist

Households

Buy goods and services from firms using money.

Outer Loop →

Represents the Flow of Money (or Dollars)

Assumptions

Can simplify complex concepts and ideas, which make them easier to understand.

Scientific Method

The dispassionate development and testing of theories about how the world works.

Production Possibilities Frontier

Shows the opportunity cost of one good as measured in terms of another good.

Microeconomics

The study of how households and firms make decisions and how they interact in specific markets.

Macroeconomics

The study of economy- wide phenomena, such as inflation, unemployment, and economic growth.

Circular Flow Diagram

There are two loops in the ________ which are distinct, but related.

Inefficient Levels of Production

Occurs when the economy is producing BELOW its Production Possibilities Frontier.

Inner Loop →

Represents the Flow of Inputs and Outputs.

Households

Owns the factors of production and consumes the goods and services produced by firms.

Circular Flow Diagram

A visual model of the economy that shows how money flows through the market among households and firms.

Households

Sell the Factors of Production (Labor, Land, and Capital) to the firms.