Chapter 2 Thinking Like an Economist Circular Flow Diagram A visual model of the economy that shows how dollars flow through markets among households and firms Organization of the Economy Production Possibilities Frontier 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 Shows the trade off between the outputs of different goods Anything outside the curve is impossible for the economy to produce Anything inside the curve is an INEFFICIENT outcome Anything on the curve represents EFFICIENT levels of production If there is any change in the scenario then the PPF production possibilities frontier can move such as an advancement in technology the frontier will shift outward Microeconomics the study of how households and firms make decisions and how they interact in markets the study of small parts of economics Rent control on housing in NYC Impact of foreign competition on the U S auto industry Effects on school attendance on workers earnings Macroeconomics study of economy phenomena including inflation unemployment and economic growth the study of economics as a whole Effects of borrowing from the Federal Government Changes over time in an economies unemployment rate Alternative policies to promote growth in national living standards Positive Statements How the world IS Normative Statements how the world OUGHT SHOULD to be Factors of Production Firms produce goods and services using inputs such as labor land and capital buildings and machines Markets for Goods and Services Households are buyers and firms are sellers Markets for the Factors of Production Households are sellers and firms are buyers Econ is 3 Languages English Math Graphs The Economist as a Scientist Physicist Devise theories Collect data Analyze data to verify or refute theories Much harder for Economists to conduct experiments they have to make do with whatever data the world happens to give them Make assumptions to simplify the complex world and make it easier to understand Creating a scenario to make it easier Ex Saying the world consists only of two countries that produce only two goods when in reality there are numerous countries in the world The Economist as a Policy Adviser thinking of ways to change the world Ex The government should raise the minimum wage Economists are scientists when they are trying to explain the world Economists are policy advisors when they are trying to improve the world Counsel of Economic Advisors 3 members and a staff of a few dozen economists Economics is a young science there is still a lot to be learned
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