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Chapter 2: Thinking like an Economist Principles of Economics, 6th Edition N. Gregory Mankiw Page 1 1. Every field has its own language and its own way of thinking. a. The single most important purpose of this book (course) is to help you learn the economist’s way of thinking. The Economist as Scientist a. Economists try to address their subject with a scientist’s objectivity. b. They devise theories, collect data, and then analyze these data in an attempt to verify or refute their theories. c. The scientific method: observation, theory, and more observation. i. The interplay between theory and observation: inflation. ii. Because it is a social science, economists have less control over their data than natural scientists. iii. While teaching, economists attempt to use historical examples. iv. In research, economists attempt to correct for other forces. d. The role of assumptions i. Assumptions can simplify the complex world and make it easier to understand. ii. Assumptions can vary based on the question being asked. (1) It is reasonable to assume prices are sticky in the short run, while assuming that they are flexible in the long run. iii. Theories are judged by their results rather than the realism of their assumptions. e. Economic models i. Economists use models to learn about and illustrate the world. ii. These models are most often composed of diagrams and equations. iii. Our first model: The circular flow diagram is a visual model of the economy that shows how dollars flow through markets among households and firms. P. 24 (1) There are two types of decision makers: firms and households (2) There are two markets: (a) goods and services and (b) factors of production. (3) Goods and services flow in one direction and money in the other. (4) Figure 1: The Circular Flow. P. 25 (5) This is a simple model as it ignores the roles of government and international trade, for example. iv. Our second model: The production possibilities frontier is a graph that shows the