Chapter 2 - o Land o Capital (buildings &...

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Chapter 2: Thinking like an economist The economist as scientist Economists play two roles: o Scientists: try to explain the world. o Policy advisors: try to improve it. 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. 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”: o Households (supplier and demander.) o Firms (supplier and demander) Two markets: o The market for goods and services o The market for “factors of production” Factors of Production Factors of production: the resources the economy uses to produce o Labor
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Unformatted text preview: o Land o Capital (buildings & machines used in production plus intellectual capital) The Circular-Flow Diagram Households. o Own the factors of production, sell/rent them to firms for income o Buy and consume goods & services Firms o Buy/hire factors of production, use them to produce goods and services. o Sell goods & services. The Production Possibilities Frontier The Production Possibilities Frontier: a graph that shows the compinations of two goods the economy can possibly produce given the available resources and the available technology Examples o Two goods: computers and wheat o One resource: labor (measured in hours) The Economist as Policy Advisor As scientists, economists make Positive statements-attempt to describe the world as it is. As policy advisors, economists make Normative Statements- how the world should be....
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Chapter 2 - o Land o Capital (buildings &...

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