Chapter 2

Chapter 2 - Chapter 2 Economic Models: Trade-offs and Trade...

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Chapter 2 Economic Models: Trade-offs and Trade Scientific Method Observe facts Formulate an explanation Test explanation Accept, reject, or modify hypothesis Continue to test A model is an abstract representation of reality “Ceteris paribus” build up model, change one thing then see how it affects other things The Circular Flow Diagram A visual model of the economy that shows how transactions flow through markets among the economic agents Two Economic agents: Households: person or group of people that share their income Firm: organization that produces goods and services for sale Two markets Factor market Goods market What is missing? Role of Government International trade Financial Market Savings Investment The Production Possibilities Frontier
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With scarce resources, an economy faces a trade-off The Production Possibility Frontier (PPF) illustrates the trade-offs faced by a simplified two good economy
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Chapter 2 - Chapter 2 Economic Models: Trade-offs and Trade...

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