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Unformatted text preview: 1 Thinking like an economist Chapter 2 Science is used to explain how systems work Physical systems Chemical systems Biological systems Economic systems In each case, people have defined a set of phenomena that are linked. In each case, people have set about trying to understand WHY things are linked in particular ways. The scientific method All scientists use abstract theory to help explain how a complex systems operate. Theoretical constructs or models omit details to focus on the essence of a system or some aspect of a system. Then, they collect and analyze data to test theories. Two basic types of abstract models. Descriptive models Report facts Show the parts of a system Show the ways in which the parts are connected Analytical models Explain why the parts are linked In economics, this is done by focusing on behavior/decision making. The circular-flow model The circular-flow model is a simple way to visually show the economic transactions that occur between households and firms in the economy. It is a descriptive model that shows how important parts of our economic systems are linked together. The circular-flow model Market for Goods and Services Market for Factors of Production Firms Households Wages, rent, and profit Income Revenue Spending Inputs for production Labor, land, and capital Goods and services sold Goods and services bought 2 Microeconomics and macroeconomics Microeconomics focuses on behavior in...
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This note was uploaded on 05/09/2008 for the course ECON 0100 taught by Professor Kenkel during the Spring '08 term at Pittsburgh.
- Spring '08