Chapter 2

Chapter 2 was titled “thinking like an economist” and plays into some of the ways that economics relates to other fields. It began by relating economists to scientists in that they follow a similar system as the scientific method by making observations, which lead to theories and result in observation. They also make assumptions to simplify equations and experiments. The chapter presented two main models, the circular flow diagram and the production possibilities frontier. The chapter continued to describe economists as policy adviser, and explained the difference between normative and positive statements. It concluded by explaining some reasons why economists disagree.

The use of simplified models of the economy helped my understanding because it made it very clear what the relationship between certain variables are and how they directly cause changes to each other. The circular flow diagram made it very clear how firms, markets, and households influence each other based on the flow of inputs and outputs and the flow of dollars. This chart is extremely straight forward and has helped me in other chapters to understand how a certain action influenced others. It is not based on numbers but showing flows into and out of different groups of the economy. The production possibilities frontier shows the combination of outputs that the economy can produce with a slope measuring the opportunity cost between the two outcomes. This is useful because it shows the economy is being efficient and using all available resources if it is on the frontier. Overall, both of these models are useful because they are based on assumptions that can be used as the economy becomes more complicated to simplify it and understand why something is occurring and basically what it means.

Something I believed about the economy before reading this chapter was that the stock market is entirely unpredictable and uncontrollable. This is a positive statement because it is descriptive of how the world is and not how it should be. This matters because it is not a hopeful scenario that the stock market should be unpredictable to make it fair for everyone, yet that if people are participating legally it is.

I found that this chapter was extremely helpful for students who do not think as most economists do to find a way to relate and understand the content. The models were also very helpful for future lessons in the book, to be able to simplify them and recognize that they are based on assumptions to highlight the important variables, yet there are may external forces that influence them.