Chapter 2: Thinking Like an Economist (Mankiw, 10th Edition)

A set of Question-and-Answer flashcards covering key concepts from the chapter: roles of economists, scientific method, models, circular-flow diagram, PPF, opportunity cost, micro vs macro, positive vs normative statements, and policy context.

What are economists' two roles and how do they differ?

Scientists who explain how the world works and policy advisors who aim to improve it through policy recommendations.

What is the scientific method in economics?

Observation -> theory -> more observation to test the theory; evaluate the theory; no laboratory experiments; use natural/historical experiments.

Why do economists use simplifying assumptions and models?

To simplify the complex world, focus on what matters, and make it easier to understand; models are built with assumptions and can be revised.

What is the Circular-Flow Diagram?

A visual model of the economy showing how dollars flow between households and firms in two markets: goods and services, and factors of production.

Who are the two decision makers in the circular-flow diagram?

Firms and households.

What are the two markets in the circular-flow diagram?

Markets for goods and services; markets for factors of production (inputs).

In the circular-flow diagram, who buys and sells in the Goods & Services market?

Households buy; firms sell.

In the circular-flow diagram, who buys and sells in the Markets for Factors of Production?

Firms hire and use factors of production; households supply labor, land, and capital.

What is the Production Possibilities Frontier (PPF)?

A graph showing the maximum feasible combinations of outputs the economy can produce given available resources and technology.

What does a point on the PPF represent?

Efficient production—full utilization of resources.

What do points inside the PPF represent?

Feasible but inefficient; underutilization of resources.

What do points outside the PPF represent?

Not feasible with the current resources and technology.

What is the opportunity cost in the context of the PPF?

The slope of the PPF—the amount of one good that must be sacrificed to produce more of the other.

In the airplane and soybeans example, what is the opportunity cost of producing the first 1,000 tons of soybeans?

20 airplanes.

In the same example, what is the opportunity cost of producing 1 airplane?

50 tons of soybeans.

In the same example, what is the opportunity cost of 1 ton of soybeans?

0.02 airplanes.

What causes the PPF to shift outward?

Economic growth through more resources or improved technology.

What is the shape of a PPF with constant opportunity cost?

A straight line.

What is the shape of a bowed-outward PPF?

A bowed outward curve, indicating increasing opportunity costs as more of one good is produced.

Why is the PPF bowed outward?

Because different workers have different skills and resources have varying productivity, leading to different opportunity costs.

What is microeconomics?

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

What is macroeconomics?

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

What is a positive statement?

Descriptive; describes the world as it is and can be tested or confirmed with evidence.

What is a normative statement?

Prescriptive; expresses how the world ought to be and involves value judgments.

What kinds of institutions in Washington employ economists?

Council of Economic Advisers; Office of Management and Budget; Department of the Treasury; Department of Labor; Department of Justice; Congressional Budget Office; Federal Reserve.

Why might economists' advice not be followed?

Policymakers weigh advice against political constraints, trade-offs, and other considerations; decisions are not made on economic analysis alone.

Why do economists often disagree?

Differences in scientific judgments (theories, data interpretation) and differences in values or political philosophy; yet some propositions are widely agreed upon.