Thinking like an Economist
The Scientific Method: Observation, Theory, and more Observation
Economists use theory and observations. They devise theories, collect data, and then
analyze these data in am attempt to verify or refute their theories. They’re unable to
perform experiments so they must gather natural experiments offered to them
through history (economy of the past).
The Role of Assumptions
Assumptions can simplify the complex world and make it easier to understand.
The Circular flow diagram
Decisions are made by households and firms. Households and firms interact in the
markets for goods and services (where households are buyers and firms are sellers).
The outer set of arrows shows the flow of dollars and the inner set of arrows shows
the corresponding flow of inputs and outputs.
The Production Possibilities Frontier (PPF)
The PPF is a graph that shows the combinations of output that the economy can
possibly produce given the available factors of production and the available
Points on the PPF represent efficient levels of production. Points on the inside
represent an inefficient outcome. Points outside of the PPF graph represent an
Microeconomics and Macroeconomics
Microeconomics is the study of how households and firms make decisions and how
they interact in specific markets. Macroeconomics is the stu