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Chapter 2

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Bridget O' Shaughnessy

Chapter 2 Thinking like an Economist Page 21-51 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 production technology. 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 infeasible point. 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
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