Thinking Like an Economist (CH02)

2-1 The Economist as Scientist

2-1a The Scientific Method: Observation, Theory, and More Observation
2-1b The Role of Assumptions
2-1c Economic Models
2-1d Our First Model: The Circular-Flow Diagram
2-1e Our Second Model: The Production Possibilities Frontier
2-1f Microeconomics and Macroeconomics

2-2a Positive versus Normative Analysis
2-2b Economists in Washington
2-2c Why Economists' Advice Is Not Always Followed


2-3 Why Economists Disagree

2-3a Differences in Scientific Judgments
2-3c Perception versus Reality

Summary

• Economists try to address their subject with a scientist's objectivity. Like all  scientists, they make appropriate assumptions and build simplified models to understand the world around them. Two simple economic models are the circular-flow diagram and the production possibilities frontier.
• The field of economics is divided into two subfields: microeconomics and macroeconomics. Microeconomist study decision making by households and firms and their interaction among households and firms in the marketplace. Macroeconomists study the forces and trends that affect the economy as a whole.
• A positive statement is an assertion about how the world is. A normative statement is an assertion about how the world ought to be. When economist make normative statements, they are acting more as policy advisers than as scientists.
• Economists who advise policy makers sometimes offer conflicting advice either because of differences in scientific judgments or because of difference in values. At other times, economists are united in the advice they offer, but policymakers may choose to ignore the advice because of the many forces and constraints imposed by the political process.

Key Concepts

• Circular-flow diagram: A visual model o f the economy that shows how dollars flow though markets among households and firms.
• 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.

• Microeconomics: The study of how households and firms make decisions and how they interact in markets.
• Macroeconomics: The study of economy wide phenomena, including inflation, unemployment, and economic growth. 
• Positive statement: Claims that attempt to describe the world as it is.
• Normative statements: Claims that attempt to prescribe how the world should be.