2.1  a. The Scientific Method

Unlike the methodological sciences, such as mathematics and decision theory, which use the hypothetical-deductive method and may be fully expressed in complex mathematical models because their only truth criterion is logical consistency; the substantive sciences that have as their truth criterion the correspondence to reality, adopt an empirical-deductive method, and are supposed to generalize from often unreliable regularities and tendencies. ^[1]

Example: Observing facts and trends to conclude that heath care spending in the U.S. has increased faster than other spending categories than before. ^[2]

^{Economics as Science [3]}

2.1 b. The Role of Assumptions

Accepted cause and effect relationships, or estimates of the existence of a fact from the known existence of other fact(s). ^[4]

Example: When modern industrial conditions are introduced in backward countries, they should produce similar results. ^[5]

^{Assumptions in Economics [6]}

2.1 c. Economic Models

An economic model is a simplified description of reality, designed to yield hypotheses about economic behavior that can be tested. ^[7]

Example. The standard model of supply and demand. ^[7]

^{Economic Models [6]}

2.1 d. The Circular-Flow Model

A depiction of how money and products are exchanged within an economy. A circular flow diagram might be used by a business to show how a specific series of exchanges of goods, services and payments make up the building blocks of a given economic system of interest. ^[9]

Example: The goods or services produced by a firm are consumed by the local community in exchange of some money. That money is used by the firm to market the goods, and for its production and labor costs. When the firm hires employees, their earnings go back to the community in exchange of the labor, land and capitals that they supplied to the firm.

^{Circular Flow Model [10]}

2.1 e. The Production Possibilities Frontier

The production possibility frontier is a curve depicting all maximum output possibilities for two goods, given a set of inputs consisting of resources and other factors. ^[11]

Example: A firm decided to manufacture computers and textbooks. It can either produce 40 textbooks and 7 computers or 70 textbooks and 3 computers, it is up to the firm to decide what it needs more. The opportunity cost of producing an additional 30 textbooks is 3 computers. ^[11]

^{Production Possibilities Frontier [12]}

2.1 f. Macroeconomics and Microeconomics

Microeconomics is the study of decisions that people and businesses make regarding the allocation of resources and prices of goods and services. Macroeconomics, on the other hand, is the field of economics that studies the behavior of the economy as a whole and not just on specific companies, but entire industries and economies. ^[13]

Example: Macroeconomics include concepts of Gross Domestic Product (GDP), unemployment rates, growth rate, etc. while microeconomics include the study of concepts like how business establish prices, and how taxes influences an individual’s decisions. ^[14]

^{Microeconomics and Macroeconomics [15]}