CHAPTER 2:
THE ECONOMIC WAY OF THINKING
Dr. Widad Soufi

Economics is a science built through the
following steps:


Observation
Model building
 What is a model?
 Assumptions



Testing
Principles
Theories

Circular flow diagram:
 What is it representing?

Production possibilities frontier (PPF):
 What is it representing?
 Scarcity
 Production efficiency:
 Definition
 Trade-off
 Opportunity cost
 Concavity:
 Unequal productivity of resources
 Increasing opportunity cost
 Technological change:
 Definition
 Change in PPF
 Economic growth

Microeconomics:


Definition: Study of the choices made by households
and firms and how they interact in markets for
resources and goods and services. It also studies the
effects of government policies on those choices.
Macroeconomics:

Definition: Study of aggregate behaviors such as
aggregate supply and demand, aggregate saving and
investment, and other aggregate phenomena such as
inflation, unemployment, economic growth.
Positive statement:
Observation that describes how the real world is.
(scientist/objective)
 Normative statement:
Claim that prescribes how the real world should
be.
(policy adviser/subjective)
 Fundamental difference:
Tests/Data/Values


Disagreement about positive statements:



Different schools of thought/theories
Example
Disagreement about the normative views:


Different backgrounds/values
Example
1.
2.
3.
4.
5.
6.
How is economics like a science
Should an economic model describe reality
exactly?
Why do economists make assumptions?
What are the two subfields into which economics
is divided? Explain what each subfield studies?
What is the difference between a positive and a
normative statement? Give an example of each.
Why do economists sometimes offer conflicting
advice to policymakers?

Solve the following problems: 3, 4, 6, 7, 13

Mankiw, Gregory. Principles of
Macroeconomics. Third edition.