Lecture 1 Thinking Like an Economist

Terminology is economics

supply, opportunity cost, elasticity, consumer surplus, demand, compartative advantage deadweight loss

opportunity cost

can be monetary or not

economics trains you to

• think in alternatives

• evaluate the cost of individual and social choices

• examine and understand how certain events and issues are related

the economic way of thinking

• involves thinking analytically and objectively

  • makes use of the scientific method

the scientific method

observation, theory, and more observation

what does the scientific method do?

• uses abstract models to help explain how a complex, real world operates

  • develops theories, collects and analyzes data to evaluate the theories

The Role of Assumptions

• economists make assumptions in order to make the world easier to understand

• the art in scientific thinking is deciding which assumptions to make

  • economists use different assumptions to answer different questions

why do economists use models

to simplify reality in order to improve our understanding of the world

what are the two main models

circular flow diagram and the production possibilities frontier

circular flow diagram

visual model of the economy that shows how dollars flow through markets among households and firms

what are inputs

raw materials

what are outputs?

final products

what is capital

anything you can use to get to the final product

what are firms?

• produce and sell goods and services

  • hire and use factors of production

households

• buy and consume goods and services

  • own and sell factors of produstion

markets for goods and services

• firms sell

  • households buy

markets for factors of production

• households sell

  • firms buy

factors of production

• inputs used to produce goods and services

  • land, labor, and capital

the production possibilities frontier

graph that shows the combinations of output that the economy can possibly produce given the available factors of production and the available production technology

concepts illustrated by PPF

• efficiency

• trade offs

• opportunity cost

• economic growth

microeconomics

• focuses on the individual parts of the economy

  • how households and firms make decisions and how they interact in specific markets

macroeconomics

• looks at the economy as a whole

• economy-wide phenomena, including inflation, unemployment, and economic growth

when economists are trying to explain the world

they are scientists

when economists are trying to change the world

they are policy advisors