Chapter 2 - 2 Circular-flow Diagram – Is a visual model...

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Chapter 2 1. Differences in Scientific Judgments a. Science is a search for understanding about the world b. Economists have different hunches about validity of alternative theories or about the size of important parameters that measure economic variables. i. Ex: Whether gov’t should tax a household’s income or its consumption (spending). Switch from income tax to consumption tax. Might lead to higher living standards and growth in productivity. 2. Differences in Values a. How different classes should be taxed? b. Perfecting the science of economics won’t tell us who should pay more. 3. Perception versus Reality Key Terms 1. Scientific Method – The dispassionate development and testing of theories about how the world works.
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Unformatted text preview: 2. Circular-flow Diagram – Is a visual model of the economy that shows how dollars flow through markets among households and firms. 3. Production Possibilities Frontier – A graph that shows the combinations of output that the economy can possibly produce given the available factors of production and the available production technology. 4. Microeconomics – Study of how households and firms make decisions and interact in markets. 5. Macroeconomics – Study of economy-wide phenomena including inflation, unemployment, and economic growth. 6. Positive Statements – Attempts to describe the world as it is. 7. Normative Statements – Attempts to prescribe how the world should be....
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