Thinking like an Economist

Scientific Method

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

Assumptions

These simplify the complex world, make it easier to understand.

Model

A highly simplified representation of a more complicated reality.

Circular-flow diagram

This refers to a visual model of the economy, which shows how dollars flow through markets among households and firms.

Factors of Production

The resources the economy uses to produce goods & services,

including

▪ labor

▪ land

▪ capital (buildings & machines used in production)

Households

-Own the factors of production, sell/rent them to firms for income

-Buy and consume goods & services

Firms

-Buy/hire factors of production, use them to produce goods and services

Production Possibilities Frontier

A graph that shows the combinations of two goods the economy can possibly produce, given the available resources and the available technology

Microeconomics

The study of how households and firms make decisions and how they interact

in markets.

Macroeconomics

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

positive statements

attempt to describe the world as it is.

Normative Statements

attempt to prescribe how the world should be.