Thinking Like an Economist
Economics trains you to. . . .
Think in terms of 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.
Uses abstract models to help explain how a complex, real world operates.
Develops theories, collects and analyzes data to evaluate the theories.
The Scientific Method: Observation, Theory, and More Observation
•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.
Economic Models
•Economists use models to simplify reality in order to improve our understanding of the world.
•Two of the most basic economic models are:
•The Circular Flow Diagram
•The Production Possibilities Frontier
The circular-flow diagram is a visual model of the economy that shows how dollars flow through markets among households and firms
Think in terms of 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.
Uses abstract models to help explain how a complex, real world operates.
Develops theories, collects and analyzes data to evaluate the theories.
The Scientific Method: Observation, Theory, and More Observation
•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.
Economic Models
•Economists use models to simplify reality in order to improve our understanding of the world.
•Two of the most basic economic models are:
•The Circular Flow Diagram
•The Production Possibilities Frontier
The circular-flow diagram is a visual model of the economy that shows how dollars flow through markets among households and firms
•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 production
•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 is a 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 the production possibilities frontier
•Efficiency
•Trade-offs
•Opportunity cost
•Economic growth
Microeconomics and Macroeconomics
•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
THE ECONOMIST AS POLICY ADVISOR
•When economists are trying to explain the world, they are scientists.
•When economists are trying to change the world, they are policy advisors.
THE ECONOMIST AS POLICY ADVISOR
•When economists are trying to explain the world, they are scientists.
•When economists are trying to change the world, they are policy advisors.
WHY ECONOMISTS DISAGREE
•They may disagree about the validity of alternative positive theories about how the world works.
•They may have different values and, therefore, different normative views about what policy should try to accomplish.
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