Thinking Like an Economist


Thinking Like an Economist


Every field of study has its own terminology
Mathematics
integrals  axioms  vector spaces
Psychology
ego   id  cognitive dissonance
Law
promissory  estoppel  torts  venues
Economics
supply opportunity cost  elasticity consumer surplus demand comparative advantage deadweight loss



in psychology, cognitive dissonance is the mental stress or discomfort experienced by an individual who holds two or more contradictory beliefs, ideas, or values at the same time, or is confronted by new information that conflicts with existing beliefs, ideas, or values

the id (Latin for "it") is the unorganized part of the personality structure that contains a human's basic, instinctual drives.

The ego (Latin "I") acts according to the reality principle; i.e. it seeks to please the id's drive in realistic ways that will benefit in the long term rather than bring grief. At the same time, Freud concedes that as the ego "attempts to mediate between id and reality, it is often obliged to cloak the Ucs. [Unconscious] commands of the id with its own Pcs.

In law, estoppel is a set of doctrines in which a court prevents a litigant from taking an action the litigant normally would have the right to take, in order to prevent an inequitable result.

A tort, in common law jurisdictions, is a civil wrong that unfairly causes someone else to suffer loss or harm resulting in legal liability for the person who commits the tortious act, called a tortfeasor. 



Thinking Like an Economist

Economics trains you to. . . . 
Think in terms of alternatives.
Evaluate the cost of individual and social choices.
Examine and understand how certain events and issues are related.



THE ECONOMIST AS A SCIENTIST
The economic way of thinking . . .
Involves thinking analytically and objectively.
Makes use of the scientific method.




The Scientific Method: Observation, Theory, and More Observation


Uses abstract models to help explain how a complex, real world operates.
Develops theories, collects, and analyzes data to evaluate the theories.



The Role of Assumptions


 Economists make assumptions in order 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.




Economic Models
Economists use models to simplify reality in order to improve our understanding of the world
 Two of the most basic economic models include:
The Circular Flow Diagram
The Production Possibilities Frontier





Our First Model: The Circular-Flow Diagram
The circular-flow diagram is a visual model of the economy that shows how dollars flow through markets among households and firms.



The Circular Flow

The Circular Flow
The Circular Flow




Our First Model: The Circular-Flow Diagram

Firms
 Produce and sell goods and services
 Hire and use factors of production
Households
 Buy and consume goods and services
 Own and sell factors of production



Our First Model: The Circular-Flow Diagram
Markets for Goods and Services
 Firms sell
 Households buy
Markets for Factors of Production
 Households sell
 Firms buy




Our First Model: The Circular-Flow Diagram
Factors of Production
 Inputs used to produce goods and services
 Land, labor, and capital




Our Second Model: The Production Possibilities Frontier

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.





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