EC120-Notes.docx - EC120 Chapter 2 Thinking Like An...

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EC120 Chapter 2 - Thinking Like An Economist The Economist as a Scientist 1. Scientists - economists employ the scientific method, the dispassionate development and testing of theories about how the world works - Used to generate evidence to explain the world 2. Policy Advisors - use the best generated evidence to inform policy development Assumptions - simplify our complex world, making it easier to understand ex. To study international trade, assume two countries and two goods - Most assumption are unrealistic, but simple to learn and provide useful insights about the real world Models - highly simplified representation of a more complicated reality - Economists use models to study economic issues and they omit many details to allow us to see what is truly important Microeconomic Tools : Tables & Diagrams, Graphs, and Math Understanding Graphs Graphs - express the relationship between variables 1. When developing theory, provides visual expression of ideas 2. When analyzing data, provides visual relationship between variables Graphs of Two Variables: The Coordinate System Economists are often concerned with relationships between two or more variables ex. the relationship between study time and GPA Our Data : pairwise observation per student comprised of hours spent studying and their GPA Ordered pairs of numbers can be graphed on a two-dimensional grid - x-coordinate tells us the horizontal location - y-coordinate tells us the vertical location - (0,0) is the origin Correlation - Two variables increasing or decreasing together have a positive correlation - Two variables moving in opposite directions (one increases when the other decreases) have a negative correlation Curves in the Coordinate System Economists often want to show how one variable affects another while holding all other variables constant. Ex. demand curve - shows the relationship b/n how quantity of a food demanded and its price, holding everything else (such as income) constant (ceteris paribus assumption) CORRELATION DOES NOT MEAN CAUSATION - cannot conclude that one causes the other, there are more factors.
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The Production Possibilities Frontier The Production Possibilities Frontier (PPF) - graph showing the combinations of two goods the economy can possibly produce given the available resources and technology Ex: Two goods: computers and wheat, one resource: labour (measured in hours). Economy has 50,000 labour hours per month available for production. What does it illustrate? - tradeoffs and OC, efficiency and inefficiency, unemployment, and economic growth Points A-E are efficient, anything under the demand curve is feasible and over the demand curve is not feasible. We don’t have a concept of efficiency for points that are not feasible. Interpreting The Production Possibilities Frontier Points on the PPF such as points A - E - possible (feasible) - efficient: all resources are fully utilized Points under the PPF such as point F - possible (feasible) - inefficient: some resources are underutilized Points above the PPF such as point G - not possible (infeasible) -
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