Chapter 2 How to think like an economist I Scientific method Observe a situation develop a theory Eg Someone choose to be assistant in Seattle rather than professor in Spokane People then collect data and do analysis on data go back and see if analysis support or reject theory II The role of assumptions Rational behavior economics III Positive vs Normative statements Positive statement claims that attempt to describe the words as it is can be tested Normative claims that attempt to prescribe how the world should be Always making positive statements Example Statement A abortion effectively lowers crime rate Positive statement can reject this statement Statement B abortion should be illegal because it s not ethical Normative statement cannot reject this statement Statement C We should increase taxes on alcohol and cigarettes because they are not healthy to human Normative Statement D Increase taxes on alcohol and cigarettes because it will decrease consumption Positive Circular flow Diagram Visual model that is easier to understand 2 entities Firms and households Flow of dollars Flow of outputs Firm Producer and seller Households Consumer Capital machines factories Production Possibilities Frontier A graph that show the combination of two goods the economy could possibly produce given the available resources and the available technology Example 2 goods computer wheat 1 resource labor measured in hours Economy has 50k labor hours per month available for production Producing 1 computer requires 100 hours labor 1 tin of wheat require 10 hr labor PPF and Opportunity Cost the slope Slope rise run Opportunity Cost what you have to give up to obtain something generally Microeconomists study decision making by households and firms and the interaction among households and firms in the marketplace Macroeconomists study the forces and trends that affect the economy as a whole Positive statement assertion about how the world is Normative assertion about how the world should be Circular flow diagram visual model of the economy that shows how dollars flow through markets among households and firms