Chapter%202 - CHAPTER 2 THINKING LIKE AN ECONOMIST ROLE OF...

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CHAPTER 2 THINKING LIKE AN ECONOMIST
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ROLE OF ECONOMISTS Economists play two main roles: Scientists: try to explain the world Policy advisors: try to improve it As scientists, economists employ the scientific method : the dispassionate development and testing of theories about how the world works.
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As scientists, economists observe phenomena, formulate theories, collect data, analyze the data in order to verify or refute their theories Experiments are difficult in economics Studying historical episodes e.g. the great depression, financial crises, etc – provide insights into how economies work. Also allows us to evaluate economic theories.
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ASSUMPTIONS & MODELS Assumptions simplify the complex world making easier to understand. Example : In studying international trade, we can assume that the world consists of two countries and two goods. This is unrealistic, but simplifies the problem and yields useful insights about the more complicated real world. Economists use models to study economic issues. A model is a highly simplified representation of a more complicated reality
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EXAMPLES OF ECONOMIC MODELS 1. The Circular-Flow Diagram 2. The Production Possibility Frontier
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THE CIRCULAR-FLOW DIAGRAM A visual model of the economy shows how dollars flow through markets among households and firms. Includes two types of “actors”: households firms Includes two markets: the market for goods and services the market for “factors of production”
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FACTORS OF PRODUCTION Factors of Production are the resources that the economy uses to produce goods & services. They include: labour land capital Households : own the factors of production sell/rent them to firms for income buy and consume goods & services
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Firms : buy/hire factors of production use them to produce goods and services sell goods & services
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This note was uploaded on 01/27/2011 for the course ECON 1000 taught by Professor Ayhoo during the Spring '10 term at California Coast University.

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Chapter%202 - CHAPTER 2 THINKING LIKE AN ECONOMIST ROLE OF...

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