Copyright 2004 South-Western/Thomson Learning2Thinking Like an EconomistCopyright 2004 South-Western/Thomson LearningThinking Like an Economist Every field of study has its own terminology Mathematics Integrals(积分） axioms (公理） vector(向量） spaces Psychology Ego(自我） id(冲动） cognitive dissonance(认知不稳定） Law Promissory(许诺） estoppel(禁止） torts(民事侵权） venues（犯罪地） Economics supply opportunity cost elasticity consumer surplus demand comparative advantage deadweight lossCopyright 2004 South-Western/Thomson LearningThinking Like an Economist Economics trains you to. . . . Think in terms of alternatives. Evaluate the cost of individual and social choices. Examine and understand how certain events and issues are related.Copyright 2004 South-Western/Thomson LearningTHE ECONOMIST AS A SCIENTIST The economic way of thinking . . . Involves thinking analytically and objectively. Makes use of the scientific method.Copyright 2004 South-Western/Thomson LearningThe Scientific Method: Observation, Theory, and More Observation Uses abstract models to help explain how a complex, real world operates. Develops theories, collects, and analyzes data to evaluate the theories.Copyright 2004 South-Western/Thomson LearningThe Role of Assumptions Economists make assumptions in order to make the world easier to understand. The art in scientific thinking is deciding which assumptions to make. Economists use different assumptions to answer different questions.Copyright 2004 South-Western/Thomson LearningEconomic ModelsCopyright 2004 South-Western/Thomson LearningEconomic Models Economists use models to simplify reality in order to improve our understanding of the world Two of the most basic economic models include: The Circular Flow Diagram The Production Possibilities FrontierCopyright 2004 South-Western/Thomson LearningOur First Model: The Circular-Flow Diagram The circular-flow diagram is a visual model of the economy that shows how dollars flow through markets among households and firms.Figure 1 The Circular FlowCopyright 2004 South-WesternSpendingGoods and services boughtRevenueGoods and services soldLabor, land, and capitalIncome= Flow of inputs and outputs= Flow of dollarsFactors of productionWages, rent, and profitFIRMS Produce and sell goods and services Hire and use factors of productionBuy and consume goods and services Own and sell factors of productionHOUSEHOLDSHouseholds sell Firms buyMARKETS FOR FACTORS OF PRODUCTIONFirms sell Households buyMARKETS FOR GOODS AND SERVICESCopyright 2004 South-Western/Thomson LearningOur First Model: The Circular-Flow Diagram Firms Produce and sell goods and services Hire and use factors of production Households Buy and consume goods and services Own and sell factors of productionCopyright 2004 South-Western/Thomson LearningOur First Model: The Circular-Flow Diagram Markets for Goods and Services Firms sell Households buy Markets for Factors of Production Households sell Firms buyCopyright 2004 South-Western/Thomson LearningOur First Model: The Circular-Flow Diagram Factors of Production Inputs used to produce goods and services Land, labor, and capitalCopyright 2004 South-Western/Thomson LearningOur Second Model: The Production Possibilities Frontier The production possibilities frontier 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.Figure 2 The Production Possibilities FrontierCopyright2003 Southwestern/Thomson LearningProduction possibilities frontierABCQuantity of Cars Produced2,2006001,00030007002,0003,0001,000Quantity of Computers ProducedDCopyright 2004 South-Western/Thomson LearningOur Second Model: The Production Possibilities Frontier Concepts Illustrated by the Production Possibilities Frontier Efficiency Tradeoffs Opportunity Cost Economic GrowthFigure 3 A Shift in the Production Possibilities FrontierCopyright 2004 South-WesternEQuantity of Cars Produced2,0007002,10075004,0003,0001,000Quantity of Computers ProducedACopyright 2004 South-Western/Thomson LearningMicroeconomics and Macroeconomics Microeconomics focuses on the individual parts of the economy. How households and firms make decisions and how they interact in specific markets Macroeconomics looks at the economy as a whole. Economy-wide phenomena, including inflation, unemployment, and economic growthCopyright 2004 South-Western/Thomson LearningTHE ECONOMIST AS POLICY ADVISOR When economists are trying to explain the world, they are scientists. When economists are trying to change the world, they are policy advisor.Copyright 2004 South-Western/Thomson LearningPOSITIVE VERSUS NORMATIVE ANALYSIS Positive statements are statements that attempt to describe the world as it is. Called d