Chapter 2 - Thinking Like An Economist

1. The Economist As A Scientist

• Economist follow the scientific method

  • Observations help to develop theories

  • Collect data to analyze & evaluate theories

  • Historical data + dynamic society

• Assumptions make the world easier to understand

• Economists use economic models to explain the world around us

• The First Model: The Circular Flow Diagram

  • Circular Flow Diagram - a visual model of the economy that shows how dollars flow through the markets among households & firms

  • Factors of Production (FoP/inputs) - land (N), labor (L), + capital (K)

• Second Model: The Production Possibilities Frontier (PPF)

  • PPF - a graph shows the combinations of output that the ceremony can possibly produce given the available factors of production & the available production technology

    • (represents what the nation could possibly produce)

• Microeconomics & Macroeconomics

  • Microeconomics: the study of how households & firms make decisions & how they interact

  • Macroeconomics: the study of economy-wide phenomena; inflation, unemployment + economic growth

    • Phenomena - things we can’t control