Chapter 2

Economists try to address their subject with a scientist’s objectivity. Like all scientists,

they make appropriate assumptions and build simplified models to understand the world around

them. Two simple economic models are the circular-flow diagram and the production possibilities

frontier. The circular-flow diagram shows how households and firms interact in markets

for goods and services and in markets for the factors of production. The production possibilities frontier shows how

society faces a trade-off between producing different goods. The field of economics

is divided into two subfields: microeconomics and macroeconomics. Microeconomists study decision making

by households and firms and the interactions among households and firms in the marketplace.