Ben Katz Period 2 8-22-11 Chapter 2 Outline I. Thinking Like an Economist A. Economists have their own language. B.

Economists try to look at economics objectively. C. Economists use the scientific method- the dispassionate development and testing of theories about how the world works. II. The Scientific Method: Observation, Theory, and More Observation A. Economists face a large problem with using the scientific method- experiments are difficult in economists. a. Economists cannot alter the economy to preform experiments. B. Economists replace lab experiments with natural experiments over history. III. The Role of Assumptions A. Economists make assumptions in order to make a complex world simpler and easier to understand. a. The art of scientific thinking is to know what assumptions to make. IV. Economic Models A. Economists use models to learn about the world. a. Economists omit many details to see what it truly important. b. Economists assume away may details. V. Our First Model: The Circular-Flow Diagram A. A circular-flow diagram is a visual model of the economy that shows how dollars flow through markets among house-holds and firms. a. The decision makers in this model are households and firms. b. Firms and households interact in the markets for goods and services and markets for factors of production. VI. Our Second Model: The Production Possibilities Frontier A. 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 technology. a. Outcomes are efficient if the economy gets all that it can from its scarce resources. b. The production possibilities frontier shows that people face tradeoffs.

VII. Microeconomics and Macroeconomics A. Microeconomics is the study of how households and firms make decisions and how they interact in specific markets. B. Macroeconomics is the study of economy-wide phenomena, including inflation, unemployment, and economic growth. C. One must understand both subfields to understand the concepts in economics. VIII. Positive vs. Normative Analysis A. Positive statements are descriptive. They make a claim about how the world is. B. Normative statements are prescriptive. They make a claim about how the world ought to be. C. The key difference between the two is how their validity. VIII. Economists in Washington A. Economists advice is not always straightforward. a. Economists are aware that there are tradeoffs in most policy decisions. B. The president receives advice from economists in many departments, such as the Departments of Treasury, Labor, and Justice. C. Congress relies on the Congressional Budget Office, which has economists. D. The Federal Reserve has economists as well. E. Economists affect policy decisions directly and indirectly. X. Differences in Scientific Judgments A. Economists sometimes disagree because they have different hunches about the validity of alternative theories or about the size of important parameters that measure how economic variables are related. XI. Differences in Values A. Economists give conflicting advice sometimes because they have different values. XII. Perception vs. Reality A. Although some disagreements between economists are inevitable, economists agree on a lot. B. Even though economists oppose them, some policies are still in effect because economists havent convinced the general public that these policies are undesirable.