TOPIC 2

• Psychology terminology

  • ego
  • id
  • cognitive dissonance
• The Circular Flow Diagram is a visual model of the economy showing how dollars flow through markets among households and firms
• Economics terminology


  • supply
  • opportunity cost
  • elasticity
  • consumer surplus
  • demand
  • comparative advantage
  • deadweight loss
• The economic way of thinking involves thinking analytically and objectively and makes use of the scientific method
• Every field of study has its own terminology
• Economists make assumptions 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
• Markets for Goods and Services

  • Firms sell, households buy
  • Households sell, firms buy
• Households


  • Buy and consume goods and services, own and sell factors of production
  • Sell goods and services, firms buy
• Law terminology

  • promissory
  • estoppel
  • torts
  • venues
• Economics trains you to think in terms of alternatives, evaluate the cost of individual and social choices, and examine how certain events and issues are related
• Mathematics terminology


  • integrals
  • axioms
  • vector spaces
• The Scientific Method

  1. Uses abstract models to help explain how a complex, real world operates

  2. Develops theories, collects, and analyzes data to evaluate the theories
• Economic Models

  1. Economists use models to simplify reality in order to improve understanding of the world

  2. Two basic economic models are the Circular Flow Diagram and the Production Possibilities Frontier
• Firms


  • Produce and sell goods and services, hire and use factors of production
  • Buy and consume goods and services, own and sell factors of production
• Markets for Factors of Production

  • Firms sell, households buy
  • Households sell, firms buy
• Markets for Goods and Services
• Markets for Factors of Production
• Firms


  1. Produce and sell goods and services

  2. Hire and use factors of production
• Factors of Production
• When economists are trying to explain the world, they are scientists. When economists are trying to change the world, they are policy advisors
• Macroeconomics looks at the economy as a whole. Economy-wide phenomena, including inflation, unemployment, and economic growth
• Concepts Illustrated by the Production Possibilities Frontier

  • Efficiency
  • Tradeoffs
  • Opportunity Cost
  • Economic Growth
• Second Model: The Production Possibilities Frontier
• Positive statements are statements that attempt to describe the world as it is. Called descriptive analysis. Normative statements are statements about how the world should be. Called prescriptive analysis
• Higher federal budget deficits will cause interest rates to increase. (Positive)
• State governments should be
• Markets for Goods and Services

  1. Firms sell

  2. Households buy
• 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
• Households

  1. Buy and consume goods and services

  2. Own and sell factors of production
• Markets for Factors of Production

  1. Households sell

  2. Firms buy
• First Model: The Circular-Flow Diagram
• Factors of Production

  1. Inputs used to produce goods and services

  2. Land, labor, and capital
• THE ECONOMIST AS POLICY ADVISOR
• Microeconomics focuses on the individual parts of the economy. How households and firms make decisions and how they interact in specific markets
• POSITIVE VERSUS NORMATIVE ANALYSIS
• The income gains from a higher minimum wage are worth more than any slight reductions in employment. (Normative)
• An increase in the minimum wage will cause a decrease in employment among the least-skilled. (Positive)
• Higher federal budget deficits


  Cause interest rates to increase
• Economists make appropriate assumptions and build simplified models in order to understand the world around them
• A normative statement is an assertion about how the world ought to be