Chapter 2 and 3 - The Economist as Scientist Economists...

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The Economist as Scientist s Economists play two roles: 1. Scientists: try to explain the world 2. Policy advisors: try to improve it s In the first, economists employ the cientific method THINKING LIKE AN ECONOMIST 0 scientific method , the dispassionate development and testing of theories about how the world works.
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Assumptions & Models s Assumptions simplify the complex world, make it easier to understand. s Example: To study international trade, assume two countries and two goods. nrealistic, but simple to learn and THINKING LIKE AN ECONOMIST 1 Unrealistic, but simple to learn and gives useful insights about the real world. s Model: a highly simplified representation of a more complicated reality. Economists use models to study economic issues.
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Our First Model: The Circular-Flow Diagram s The Circular-Flow Diagram : a visual model of the economy, shows how dollars flow through markets among households and firms s Two types of “actors”: THINKING LIKE AN ECONOMIST 2 s households s firms s Two markets: s the market for goods and services s the market for “factors of production”
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Factors of Production s Factors of production: the resources the economy uses to produce goods & services, including s labor s land THINKING LIKE AN ECONOMIST 3 s capital (buildings & machines used in production)
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FIGURE 1: The Circular-Flow Diagram Households : s Own the factors of production, sell/rent them to firms for income s Buy and consume goods & services ouseholds irms THINKING LIKE AN ECONOMIST 4 Households Firms Firms : s Buy/hire factors of production, use them to produce goods and services s Sell goods & services
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FIGURE 1: The Circular-Flow Diagram ouseholds irms Spending G & S bought G & S sold Revenue Markets for Goods & Services THINKING LIKE AN ECONOMIST 5 Markets for Factors of Production Households Firms Income Wages, rent, profit Factors of production Labor, land, capital
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Our Second Model: The Production Possibilities Frontier s The Production Possibilities Frontier (PPF) : a graph that shows the combinations of two goods the economy can possibly produce given the available resources and the available chnology THINKING LIKE AN ECONOMIST 6 technology s Example: s Two goods: computers and wheat s One resource: labor (measured in hours) s Economy has 50,000 labor hours per month available for production.
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PPF Example s Producing one computer requires 100 hours labor.
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This note was uploaded on 11/14/2010 for the course ECN 200 taught by Professor - during the Spring '10 term at Oakland University.

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Chapter 2 and 3 - The Economist as Scientist Economists...

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