In this chapter you will: See how economists apply the methods of science, consider how assumptions and models can shed light on the world, learn two simple models - the circular flow and the production possibilities frontier, distinguish between microeconomics and macroeconomics,. | 2 Thinking Like an Economist Thinking Like an Economist Every field of study has its own terminology Mathematics integrals axioms vector spaces Psychology ego id cognitive dissonance Law promissory estoppel torts venues Economics supply opportunity cost elasticity consumer surplus demand comparative advantage deadweight loss 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. 2 THE ECONOMIST AS A SCIENTIST The economic way of thinking . . . Involves thinking analytically and objectively. Makes use of the scientific method. 3 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. 4 The Role of Assumptions Economists make assumptions in order to make the | 2 Thinking Like an Economist Thinking Like an Economist Every field of study has its own terminology Mathematics integrals axioms vector spaces Psychology ego id cognitive dissonance Law promissory estoppel torts venues Economics supply opportunity cost elasticity consumer surplus demand comparative advantage deadweight loss 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. 2 THE ECONOMIST AS A SCIENTIST The economic way of thinking . . . Involves thinking analytically and objectively. Makes use of the scientific method. 3 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. 4 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 include: The Circular Flow Diagram The Production Possibilities Frontier Our First Model: The Circular-Flow Diagram The circular-flow diagram is a visual model of the economy that shows how dollars flow through markets among households and firms. 6 Figure 1 The Circular Flow Copyright © 2004 South-Western Spending Goods and services bought Revenue Goods and services sold Labor, land, and capital Income = Flow of inputs and outputs = Flow of dollars Factors of production Wages, rent, and profit FIRMS Produce and sell goods and services Hire and use factors of production Buy and consume goods and services Own and sell factors of production HOUSEHOLDS Households sell Firms buy .
