Summary Essentials of Economics

A snapshot of the summary - Essentials of Economics Author: N Gregory Mankiw ISBN: 9781337091992

• 1 Introduction

• 1.2.1 The economist as scientist

• How do scientists (like economists) develop a scientific method?

  By observing reality, devising a theory, and observing more, in order to verify/dispute the theory.
• What is the purpose of assumptions, and why do economists make assumptions when trying to understand economic problems?

  
  - To simplify the complex world and make the problem easier to understand.
  - To focus on the essence of the problem.
• What is the purpose of economic models, and why are they used by economists?

  Economic models simplify reality. Economists use economic models to learn about the world.
• What is the Circular-Flow Diagram, and what is its purpose?

  
  - A schematic representation of the economy, that explains how the economy is organized.
  - Shows how households and firms interact with each other.
• Which are the inputs, necessary to produce something (the factors of production)?

  1. Land (natural resources)
  2. Labour
  3. Capital (tools)
  4. Entrepreneurship
• Why is applying the scientific method particularly challenging in economics (unlike in other sciences)?

  Because conducting economical experiments is often impractical: the data is mostly given and not derived from self performed experiments.
  Ex: a nation's monetary policy cannot be changed simply to generate useful data.
• What is the role of firms, in the Circular Flow Diagram?

  - Firms produce/sell goods and services for revenue, on the "markets for goods and services".
  - Firms use/hire factors of production, for wages, rent and profit on the "markets of factors of production".
• What is the role of households, in the circular flow diagram?

  - Households spend money to buy/consume goods and services on the 'markets for goods and services'.
  - Households own/sell the factors of production for income on 'the markets for factors of production'.
• What useful data do economists use, in order to find a subsitute for laboratory experiments?

  Economists look at history (naturally occurring experiments). Historical episodes can be valuable to evaluate present economic theories.
• What is the Production Possibilities Frontier?

  A graph that shows various combinations of output that the economy can possibly produce (given the available factors of production/technology).