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United States (205,928)
Economics (994)
Chapter 2

Chapter 2 - Thinking Like an Economist

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Department
Economics
Course
Economics 10a
Professor
Gregory Mankiw
Semester
Fall

Description
Chapter 2: Thinking Like an Economist  The Economist as Scientist ­ use of scientific method  ▯observation and theories ­ difficult to conduct experiments, learn from history ­ important to decide which assumptions to make ex: prices may not change much  in short­run but very flexible in long run The Circular­Flow Diagram  ­ economy simplified to only include firms and households ­ firms produce goods and services using inputs called factors of production (labor,  land, capital) ­ households own factors of production and consume goods and services ­ markets for goods and services  ▯households are buyers, firms are sellers ­ markets for factors of production  ▯households are sellers (provide inputs), firms  are buyers ­ inner loop  ▯flow of inputs and outputs, households sell use of labor, land and  capital which produces goods and services that are sold to households ­ outer loop  ▯corresponding flow of dollars, households pay for goods and services,   firms pay for factors of production, firm owners that earn money are members of  households  ­ simplistic, does not include government and international trade The Production Possibilities Frontier ­ graph that shows the various combinations of output that the economy can  produce given available factors and technology ­ divides resources ­ outcome is efficient if economy is making use of scarce resources ­ once you reach point of efficiency, trade­off occurs ­ slope reflects opportunity cost ­ often has bowed shape ex: computers vs. cars example ­ trade­off can change o
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