ch02 - Chapter 2 Thinking Like An Economist In this chapter...

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)()Chapter °" :Thinking 2Like &'&'An +*+Economist
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.4In this chapter° look for the answers to these questions" % What are economists’ two roles$%$% -.How do they differ$%$% What are models$%$% -.How do economists use them$%$% What are the elements of the )()Circular±+,Flow *)*Diagram$%$% What concepts does the diagram illustrate$%$% -.How is the 6Production 6Possibilities +,Frontier related to opportunity cost$%$% What other concepts does it illustrate$%$% What is the difference between microeconomics and macroeconomics$%$% '('(Between positive and normative$%$%
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THINKING LIKE AN ECONOMIST The +*0Economist as Scientist +*+Economists play two roles" ±² 9Scientists" try to explain the world ³² 6Policy advisors" try to improve it ./In the first² economists employ the scientific method ² the dispassionate development and testing of theories about how the world works³
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THINKING LIKE AN ECONOMIST &'&,Assumptions ´ 8Models &'&'Assumptions simplify the complex world² make it easier to understand³ +*+Example" :To study international trade² assume two countries and two goods³ Unrealistic² but simple to learn and gives useful insights about the real world³ 8Model" % a highly simplified representation of a more complicated reality³ +*+Economists use models to study economic issues³
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THINKING LIKE AN ECONOMIST Some +1Familiar 8Models &'&'A road map
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THINKING LIKE AN ECONOMIST Some +1Familiar 8Models &'&'A model of human anatomy from high school biology class
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THINKING LIKE AN ECONOMIST Some +1Familiar 8Models &'&'A model airplane
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THINKING LIKE AN ECONOMIST Some +1Familiar 8Models :The model teeth at the dentist’s office Don’t forget to floss!
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THINKING LIKE AN ECONOMIST Our +1First 8Model" % The )(.Circularµ+1Flow *)/Diagram :The )(.Circularµ+1Flow *)/Diagram " a visual model of the economy² shows how dollars flow through markets among households and firms :Two types of “actors”" households firms :Two markets" the market for goods and services the market for “factors of production”
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THINKING LIKE AN ECONOMIST +1Factors of Production +1Factors of production" % the resources the economy uses to produce goods ´ services² including labor land capital µbuildings ´ machines used in production¶
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THINKING LIKE AN ECONOMIST +1F.4I,2GUR+*0E ±" % The )(.Circularµ+1Flow *)/Diagram -3Households " 5Own the factors of production² sell·rent them to firms for income '('(Buy and consume goods ´ services -.Households +,Firms +1Firms " '('(Buy·hire factors of production² use them to produce goods and services 9Sell goods ´ services
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THINKING LIKE AN ECONOMIST +1F.4I,2GUR+*0E ±" % The )(.Circularµ+1Flow *)/Diagram 3Markets for +,Factors of 6Production -.Households +,Firms ./Income Wages² rent² profit +,Factors of production 2Labor² land² capital 9Spending ,-G ´ 9S bought ,-G ´ 9S sold 8Revenue 3Markets for ,-Goods ´ 9Services
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THINKING LIKE AN ECONOMIST Our Second 8Model" % The Production Possibilities +1Frontier :The Production Possibilities +1Frontier ¶PP+1F· " a graph that shows the combinations of
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