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Chapter 2 - Chapter 2 Thinking like an Economist Every...

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Chapter 2 Thinking like an Economist Every field of study has its own terminology Mathematics integrals v axioms v vector spaces Psychology ego v id v cognitive dissonance Law promissory v estoppel v torts v venues Economics supply v opportunity cost v elasticity v consumer surplus v demand v comparative advantage v deadweight loss Economics trains you to. . . . Think in terms of alternatives. Evaluate the cost of individual and social choices. Examine and understand how certain events and issues are related. THE ECONOMIST AS A SCIENTIST The economic way of thinking . . . Involves thinking analytically and objectively. Makes use of the scientific method. Uses abstract models to help explain how a complex, real world operates. Develops theories, collects and analyzes data to evaluate the theories. The Scientific Method: Observation, Theory, and More Observation Uses abstract models to help explain how a complex, real world operates. Develops theories, collects and analyzes data to evaluate the theories. The Role of Assumptions Economists make assumptions in order to make the world easier to understand. The art in scientific thinking is deciding which assumptions to make. Economic Models Economists use models to simplify reality in order to improve our understanding of the world. Two of the most basic economic models are: The Circular Flow Diagram
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The Production Possibilities Frontier Our First Model: The Circular-Flow Diagram The circular-flow diagram is a visual model of the economy that shows how dollars flow through markets among households and firms. Figure 1: The Circular Flow Model The circular Flow diagram is a schematic representation of the organization of the economy. Decisions are made by households and firms. Households and firms interact in the markets for goods and services (where household are buyers and firms are sellers) and in the markets for the factors of production (where firms are buyers and household are sellers). The outer set of arrows shows the flow of dollars, and the inner set of arrows shows the corresponding flow of inputs and outputs.
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