Friday, September 30, 2016
Chapter 2: Thinking Like an Economist
Economists as Scientists
•Economists try to address their subject with a scientist’s objectivity.
The Scientiﬁc Method
• The scientific method involves observation, theory, and more observation.
• Economists use theory and observation like other scientists, but they do face
an obstacle that makes their task especially challenging:
Experiments are often difficult in economics.
The Role of Assumptions
• Assumptions can simplify the complex world and make it easier to understand.
• The art in scientific thinking is deciding which assumptions to make.
• Economists also use models to learn about the world that are most often
composed of diagrams and equations.
• Economic models omit many details to allow us to see what is truly important.
All the models are built with assumptions.
The Circular-Flow Diagram
Two Types of Economic Diagrams:
1. Circular-Flow Diagram: a visual
model of the economy that
shows how dollars flow through
markets among households
1 Friday, September 30, 2016
2. The Production Possibility
Frontier(PPF): a graph that
shows the combinations of
output that the economy can
possibly produce given the
available factors of production
and the available production
Microeconomics and Macroeconomics
Microeconomics: the study of how households and firms make decisions and
how they interact in markets
Macroeconomics: the study of economy-wide phenomena, including inflation,
unemployment, and economic growth
• Microeconomists might study the effects of rent control on housing in Toronto,
the impact of foreign competition on the Canadian auto indu