Ch 2 outline - Chapter 2 outline: I. The Economist as...

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Chapter 2 outline: I. The Economist as Scientist A. Economists follow the scientific method. 1. Observations help us to develop theory. 2. Data can be collected and analyzed to evaluate theories. 3. Using data to evaluate theories is more difficult in economics than in  physical science because economists are unable to generate their own  data and must make do with whatever data are available. 4. Thus, economists pay close attention to the natural experiments offered  by history. B. Assumptions make the world easier to understand. 1. Example: to understand international trade, it may be helpful to start out  assuming that there are only two countries in the world producing only  two goods.  Once we understand how trade would work between these  two countries, we can extend our analysis to a greater number of  countries and goods. 2. One important role of a scientist is to understand which assumptions one  should make. 3. Economists often use assumptions that are somewhat unrealistic but will  have small effects on the actual outcome of the answer. C. Economists use economic models to explain the world around us. 1. Most economic models are composed of diagrams and equations. 2. The goal of a model is to simplify reality in order to increase our  understanding.  This is where the use of assumptions is helpful. D. Our First Model: The Circular Flow Diagram
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1. Definition of  circular-flow diagram : a visual model of the economy  that shows how dollars flow through markets among households  and firms. 2.
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This note was uploaded on 08/31/2009 for the course EC 350 taught by Professor Sekelj during the Spring '08 term at Clarkson University .

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Ch 2 outline - Chapter 2 outline: I. The Economist as...

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