The Scientific Method.

● The scientific method involves observation, theory, and more observation

● Like other scientists, but they do face an obstacle that makes their task
especially challenging: Experiments are often difficult in economics.

The Art Of Assumptions

● Assumptions can simplify the complex world and make it easier to
understand

● The art in scientific thinking is deciding which assumptions to make.

Economic model

● Economists also use models to learn about the world that are most often
composed of diagrams and equations.
● Economic models omit many details to allow us to see what is truly important.
● All the models are built with assumptions.

CIRCULAR-FLOW DIAGRAM:

Visual model of the economy that shows how dollars flow through markets
among households and firms.
Production Possibility Frontier:

A graph that shows the combinations of output that the economy can possibly
produce with the available factors of production and the available technology.

(or technological advances)

 Micro and Macro
● Micro: the study of how households and firms make decisions and how
they interact in markets.

● Macro: The study of economy-wide phenomena, including inflation,

unemployment, and economic growth.

Policy advising:

-When economists are trying to explain the world, they are scientists

● Positive statement: claims that attempt to describe the world as it is

-When they are trying to help improve it, they are policy advisers:

● Normative statements: claims that attempt to prescribe how the world

should be

Why Economists Disagree:

1. Disagree about the validity of alternative positive theories about how the world
works.
2. They can have different values and, therefore, different normative views about
what a policy should try to accomplish.

Differences in scientific judgments and differences in values=

Disagreement
 Graphing

Purposes:

1. Economic theories: visual way to express ideas that might be less clear if
described with equations or words

2.Relationships:When analyzing economic data, graphs provide a way of finding

how variables are in fact related in the world

Graphs of a single Variable:

Graphs of Two Variable:

1. Economists are often concerned with the relationships between

variables.
2. The coordinate system makes possible the display of two variables on
a single graph.
3. Correlation between the two variables is easy to see.
CURVES IN THE COORDINATE SYSTEM:

1. Economists also often look at how one variable affects another,

holding everything else constant.
2. To see how this is done, let's consider one of the most important
graphs in economics-the demand curve.
• When a variable that is not named on either axis changes, the curve shifts.
 𝑄2−𝑄1 21−5
𝑏: 𝑃2−𝑃1
→ 6−10 =-4

𝑎: 𝑄 = 𝑎 − 4𝑃

21 = 𝑎 − 24 𝑓𝑟𝑜𝑚(4 * 6)

𝑎 = 45

𝑄 = 45 − 4𝑃
• Omitting a variable can lead to a deceptive graph.
Reverse Causality

• Economists can also make mistakes about causality by misreading its

direction.

• Observation: More dangerous cities have more police officers.

• Does having more police cause more crime?

OR

• Does having more crime cause more police hiring?

• Nothing in the graph itself allows us to establish the direction of causality.