Chapter2 - resources it has available b Shows trade-off...

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Chapter 2: Thinking Like an Economist The Economist as Scientist 1. The Scientific Method: Observation, Theory, and More Observation a. Economists try to address their subject with a scientist’s objectivity b. Tests theory’s, observes, draws conclusions c. Assumptions can simplify the complex world and make it easier to understand 2. Our First Model: The Circular-Flow Diagram a. Circular-flow Diagram: visual model of the economy that shows how dollars flow throughout markets among households and firms b. Schematic representation of the organization of the economy 3. Our Second Model: The Production Possibilities Frontier a. Production possibilities frontier: a graph that shows the combinations of output that the economy can possibly produce given the available factors of production and the available production technology a.i. With the resources the economy has, the economy can produce at any point on or inside the production possibilities frontier a.ii. Efficient: if the economy is getting all it can from the scarce
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Unformatted text preview: resources it has available b. Shows trade-off between the outputs of different goods at a given time, but the trade-off can change over time 4. Microeconomics and Macroeconomics a. Micro: the study of how households and firms make decisions and how they interact in markets b. Macro: the study of economy wide phenomena, including inflation, unemployment and economic growth The Economist as Policy Adviser 5. Positive versus Normative Analysis a. Positive Statements: claims that attempt to describe the world as it is b. Normative Statements: claims that attempt to prescribe how the world should be c. Key difference between the two= how we judge their validity c.i. Involves our views on ethics, religion and political philosophy Why Economists Disagree-Economists may disagree about the validity of alternative positive theories about how the world works-Economists may have different values and therefore different normative views about what policy should try to accomplish...
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