CH 2: Thinking like an economist

Scientific method

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

Circular flow diagram

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

Firms

produces G & S using inputs

Households

own the factors of production and consume all the G & S firms produce

Factors of production

inputs (labor, land, capital)

Markets for G & S

households are buyers and firms are sellers.

Markets for the factors of production

households are sellers, and firms are buyers. Households provide the inputs that firms use to produce G & S.

Production possibilities frontier (PPF)

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

Efficient

the economy is getting all it can from the scarce resources available

Inefficient

the economy is producing less than it could from the resources available

Unattainable

cannot be reached

Microeconomics

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

Macroeconomics

study of the overall economy (inflation, unemployment, & economic growth

Normative statement

claims that attempt to prescribe how the world should be

Positive statement

claims that attempt to describe the world as it is