Chapter two notes .docx - Chapter two Thinking like an economist 2-1 The economist as scientist Try to address their subject with a scientist’s

Chapter two notes .docx - Chapter two Thinking like an...

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Chapter two: Thinking like an economist 2-1 The economist as scientist Try to address their subject with a scientist’s objectivity o devise theories o collect data o analyze data in an attempt to verify or refute their theories scientific method: the dispassionate development and testing of theories about how the world works. o “the whole of science is nothing more than a refinement of everyday thinking” The scientific method: Observation, theory, and more observation Sir Isaac Newton apple falling o Observation and subsequent testing Economists face an obstacle that conducting experiments is often impractical o Not allowed to manipulate o Have to make do with whatever data the world happens to give them o Natural experiments offered by history The role of assumptions Assumptions can simplify the complex world and make it easier to understand o The art in scientific thinking is deciding what assumptions to make o Ex. Studying short term effects of changing prices we may assume prices might not change much o Ex. Studying long term effects of changing prices we may assume prices are completely flexible o Ex. That people are rational and people will make rational decisions Economic models Economists use models to learn about the world (Like a biology teacher using plastic replicas of the human body) o Often composed of diagrams and equations o Do not include every feature of the economy o Models are built with assumptions o Economists assume away many of the details of the economy that are irrelevant simplify reality in order to improve our understanding of it. Our first model: the circular-flow diagram Economy consist of millions of people engaged in many activities o Buying, selling, working, hiring, manufacturing, etc. Circular- flow diagram: a visual model of the economy that shows how dollars flow through markets among households and firms o Firms produce goods and services using inputs (such as; labour, land, and capital [buildings and machines]) These inputs are called the factors of production
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Households own the factors of production and consume all of the
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  • Fall '07
  • Chan

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