Chapter+2-+Thinking+Like+an+Economist+(09-10)



In this chapter, we are going to see how economists think. Therefore we will be able to think how they see economics. Question to Keep in Mind: How does the money flow in the economy?

 **Words to keep in mind:**

**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 Statement** - Claims that attempt to prescribe how the world should be
 * Circular Flow Diagram ** - A visual model of the economy that shows how dollars flow through 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

**Circular Flow Diagram: **

 - Households and Firms interact in the markets for goods and services - Firms produce goods and services by using inputs (labor, land, and capital) - Households buy the goods and services produced by the firms. - //Factors of production// are the inputs used to produce goods and services.  - Households and firms have two types of market. - Markets for goods and services - Markets for factors of production

- Households are buyers and they buy the output of goods and services that firms provide them. - Firms are sellers
 * Markets for Goods and Services** (Product Markets)

  <span style="color: #0000ff; font-family: Verdana,Geneva,sans-serif; font-size: 120%;"> <span style="font-family: Verdana,Geneva,sans-serif;">

<span style="font-family: Verdana,Geneva,sans-serif;">- Households are sellers - Firms are buyers <span style="color: #000000; font-family: Verdana,Geneva,sans-serif; font-size: 98%;"> <span style="color: #0000ff; font-family: Verdana,Geneva,sans-serif; font-size: 120%;"> <span style="color: #000000; font-family: Verdana,Geneva,sans-serif; font-size: 98%;">**ABOUT THE GRAPH:** - The inside loop shows the flow of inputs and outputs. - The outside loop shows the corresponding flow of dollars. <span style="color: #0000ff; font-family: Verdana,Geneva,sans-serif; font-size: 120%;">
 * Markets for Factors of Production** (Factor Markets) <span style="color: #0000ff; font-family: Verdana,Geneva,sans-serif; font-size: 120%;">
 * <span style="color: #0000ff; font-family: Verdana,Geneva,sans-serif; font-size: 120%;">

Production Possibility Frontier: **

A **Production Possibility Frontier** shows the various combination of outputs. The economy can produce the given available factors of production and the available production technology that firms can use to turn these factors into output. The Production Possibility Frontier shows the trade-off between within the outputs of different goods at given times.

//What does efficient mean?// - It is considered efficient if the economy is getting all it can from the scarce resources it has available.

Point A, B, C: The point where the production is the most efficient. - Point A: More production of product A. - Point B: Producing similar amount of product A and B. - Point C: More production of product B. Point Y: The point where the economy can not produce. Point X: The point that is inefficient production.

- Points on the production possibility frontier shows the efficient levels of production. - This graph shows the opportunity cost of one good as measured in terms of the other good.

//Why is the Production Possibility Frontier bowed outward?// - The opportunity cost can be lower or higher than the other product that is produced. - The opportunity cost is highest if the economy produces more product A than product B. - There are companies that specialize in one products' production, and this affects the amount that can be produced.

**[The Economist As Policy Adviser]** - **Positive Statement** vs. ** Negative Statement ** - The difference is the judgment of the validity. - Positive Statement: determine by analyzing data. - Negative Statement: evaluate by values and facts. <span style="font-family: Verdana,Geneva,sans-serif; font-size: 120%;"> <span style="color: #059494; font-family: Verdana,Geneva,sans-serif; font-size: 120%;">

<span style="display: block; font-family: Verdana,Geneva,sans-serif; text-align: center;">Without the money flowing into many different sections in this economy, it is very hard for anyone to be at a good economic status. Also, in order to understand the efficiency of the economy, we must understand the production possibility frontier.

<span style="font-family: Verdana,Geneva,sans-serif;"><span style="font-family: Verdana,Geneva,sans-serif; font-size: 120%;"> **Bibliography 2**