[Joseph_E._Stiglitz,_Carl_E._Walsh]_Economics(Bookos.org) (1)

Chapter 2
THINKING LIKE AN
ECONOMIST
∂
Economists have a distinctive way of thinking about issues, and the best way
to learn economics is to understand how to think like an economist. Thinking
like an economist involves focusing on trade-offs, incentives, exchange, information,
and distribution—the five key concepts introduced in Chapter 1—and more.
Economists focus on the choices individuals and business make when they are faced
with scarcity. These choices can involve a decision to eat at home rather than to go
to a restaurant, to go to college rather than take a job right out of high school, to
locate a plant overseas rather than in the United States, or any of a thousand other
alternatives. The choices made by individuals and business involve trade-offs and are
affected by the incentives they face, the opportunities for exchange that are available,
the information at hand, and the initial distribution of wealth. To understand choices,
economists start with a simple model of how individuals and firms interact with one
another in markets to carry out exchanges. This simple model is introduced in this
chapter and developed further in Part Two.
The Basic Competitive Model
Every day, millions of people take part in thousands of exchanges in hundreds of different
markets. Somehow, out of all these exchanges, computers are produced and
end up in student dorm rooms, food is grown and ends up on the dinner tables of
households, and electricity is delivered to millions of homes and offices at a flick of
a switch. In an economy like that of the United States, markets play a critical role in
ensuring that workers find jobs, things get produced, and firms sell their products.
Exchange and the role of markets are important, but what makes them work? How
can you be sure that your local grocery store will have bread in the morning or that
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