Chapter 2 Econ Lecture

Chapter 2 Econ Lecture - CHAPTER 2 Thinking Like An...

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C H A P T E R Thinking Like An Economist 2
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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 Circular-Flow 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 macroeconomics? Between positive and normative? 1
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THINKING LIKE AN ECONOMIST 2 The Economist as Scientist Economists play two roles: 1. Scientists: try to explain the world 2. 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.
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THINKING LIKE AN ECONOMIST 3 Assumptions & Models Assumptions simplify the complex world, make it easier to understand. Example: To study international trade, assume two countries (A and B) and two goods (x and y) . 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.
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THINKING LIKE AN ECONOMIST 4 Some Familiar Models A road map
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THINKING LIKE AN ECONOMIST 5 Some Familiar Models A model of human anatomy from high school biology class
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THINKING LIKE AN ECONOMIST 6 Some Familiar Models A model airplane
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THINKING LIKE AN ECONOMIST 7 Some Familiar Models The model teeth at the dentist‟s office Don’t forget to floss!
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THINKING LIKE AN ECONOMIST 8 Our First Model: The Circular-Flow Diagram The Circular-Flow 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”
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THINKING LIKE AN ECONOMIST 9 Factors of Production Factors of production: the resources the economy uses to produce goods & services, including labor land capital (buildings & machines used in production)
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THINKING LIKE AN ECONOMIST 10 FIGURE 1: The Circular-Flow Diagram Households : Own the factors of production, sell/rent them to firms for income Buy and consume goods & services Households Firms Firms : Buy/hire factors of production, use them to produce goods and services Sell goods & services
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THINKING LIKE AN ECONOMIST 11 FIGURE 1: The Circular-Flow 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
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THINKING LIKE AN ECONOMIST 12 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 available resources and the available technology Example: Two goods:
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Chapter 2 Econ Lecture - CHAPTER 2 Thinking Like An...

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