Like all scientists they make appropriate assumptions

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Like all scientists, they make appropriate assumptions and build simplified models in order to understand the world around them. Two simple economic models are the circular-flow diagram and the production possibilities frontier. The production possibility frontier provides a simple model to illustrate scarcity, opportunity cost and trade-offs. The circular flow diagram of the economy illustrates the relationship between households and firms as they interact in both the product and the factor markets. The distinction between positive and normative economics is that the former is about how things are, while the latter is about how things should be. A positive statement is an assertion about how the world is. A normative statement is an assertion about how the world ought to be. When economists make normative statements, they are acting more as policy advisers than scientists. The field of economics is divided into two subfields: microeconomics and macroeconomics. Microeconomists study decision making by households and firms and the interaction among households and firms in the marketplace. Macroeconomists study the forces and trends that affect the economy as a whole. Economists who advise policymakers offer conflicting advice either because of differences in scientific judgments or because of differences in values. At other times, economists are united in the advice they offer, but policymakers may choose to ignore it. Key Pitfalls (Be Careful) Learning Module #2 - Key Terms Learn each of these key terms. To test your understanding of them, go to the Mankiw web site and go to the Key-term Flashcards for Chapter 2 Key Term Definition circular-flow diagram a visual model of the economy that shows how dollars flow through markets among households and firms macroeconomics the study of economy wide phenomena, including inflation, unemployment, and economic growth microeconomics the study of how households and firms make decisions and how they interact in markets normative statements claims that attempt to prescribe how the world should be positive statements claims that attempt to describe the world as it is production possibilities frontier 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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  • Spring '12
  • Green
  • Economics, production possibilities, Economists

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