Introduction

to Economics
ECN 200
Lecture 2

Economics as a science
Like many sciences, economics has a
strong foundation in mathematics, and it
is developed by testing hypotheses.
At its core, the field of economics tries to
uncover basic universal facts.

The role of assumptions

Economists

need to make assumptions to provide

useful predictions.
The scientific method requires isolated variables
and testing to prove causality. Economists can't
possibly isolate individual variables in the real
world, so they assume most of them away to
create a model with some constancy.
For instance, the assumption in economics that
people will react in a prudent and reasonable
manner to maximize their incomes.

Circular Flow
Diagram
An illustration showing the flow of
resources from household to firms and of
products from firms to households. These
flows are accompanied by reverse flow of
money from firms to households and
from households to firms.

Production
possibility
frontier
It shows the combination of output
that can be produced within an
economy given a fixed level of
technology and the limited
resources available.

Opportunity Cost
An opportunity cost is the
next best alternative forgone.