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

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Unformatted text preview: Chapter Thinking Like An Economist In 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 CircularFlow Diagram% What concepts does the diagram illustrate% How is the Production Possibilities Frontier related to opportunity cost% What other concepts does it illustrate% What is the difference between microeconomics and THINKING LIKE AN ECONOMIST The Economist as Scientist Economists play two roles Scientists try to explain the world Policy advisors try to improve it In the first economists employ the scientific method the dispassionate development and testing of theories about how the world works THINKING LIKE AN ECONOMIST Assumptions Models Assumptions simplify the complex world make it easier to understand Example To study international trade assume two countries and two goods Unrealistic but simple to learn and gives useful insights about the real world Model% a highly simplified representation of a more complicated reality Economists use models to study economic issues THINKING LIKE AN ECONOMIST Some Familiar Models A road map THINKING LIKE AN ECONOMIST Some Familiar Models A model of human anatomy from high school biology class THINKING LIKE AN ECONOMIST Some Familiar Models A model airplane THINKING LIKE AN ECONOMIST Some Familiar Models The model teeth at the dentists office Dont forget to floss! THINKING LIKE AN ECONOMIST Our First Model% The CircularFlow Diagram The CircularFlow Diagram a visual model of the economy 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 THINKING LIKE AN ECONOMIST Factors of Production Factors of production% the resources the economy uses to produce goods services including labor land capital buildings machines used in production THINKING LIKE AN ECONOMIST FIGURE % The CircularFlow Diagram Households Own the factors of production sellrent them to firms for income Buy and consume goods services Households Firms Firms Buyhire factors of production use them to produce goods and services Sell goods services THINKING LIKE AN ECONOMIST FIGURE % The CircularFlow Diagram Markets for Factors of Production Households Firms Income Wages rent profit Factors of production Labor land capital Spending G S bought G S sold Revenue Markets for Goods Services THINKING LIKE AN ECONOMIST Our Second Model% The Production Possibilities Frontier The Production Possibilities Frontier PPF a graph that shows the combinations of two goods the economy can possibly produce given the...
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ch02 - Chapter Thinking Like An Economist In this chapter...

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