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Chapter 2 - 8-28 for Blackboard - Chapter 2 Thinking Like...

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Chapter Thinking Like an Economist 2
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The Economist as a Scientist Economics = science Economists = scientists Devise theories Collect data Analyze these data Verify or refute their theories Scientific method Dispassionate development and testing of  theories about how the world works 2
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The Economist as a Scientist The scientific method: observation, theory,  and more observation Observation Theory Conducting experiments Difficult / impossible Observation Close attention to natural experiments -  history 3
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The Economist as a Scientist The role of assumptions Assumptions Can simplify the complex world Make it easier to understand Focus our thinking - essence of the  problem Example:   To study international trade,  assume two countries and two goods.   Unrealistic, but simple to learn and  gives useful insights about the real world. 4
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The Economist as a Scientist Economic models Diagrams & equations Omit many details Allow us to see what’s truly important Built with assumptions Simplify reality to improve our  understanding of it 5
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The Economist as a Scientist Our first model: The circular-flow diagram Circular-flow diagram Visual model of the economy Shows how dollars flow through markets  among households and firms Decision makers Firms & Households  Markets For goods and services For factors of production 6
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THINKING LIKE AN ECONOMIST 7 Factors of Production Factors of production:   the resources  the economy uses to produce goods &  services,  including labor  land  capital (buildings & machines used in  production) entrepreneur 
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THINKING LIKE AN ECONOMIST 8 FIGURE 1:    The Circular-Flow Diagram Households : Own the factors of production,
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