Chapter 2 notes

Chapter 2 notes - Chapter 2 notes Thinking like an...

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Chapter 2 notes: Thinking like an Economist The Economist as a Scientist Economists try to address their subject with a scientists objectivity They devise theories, collect data, and then analyze these data in an attempt to verify or refute their theories The Scientific Method: Observation, Theory, and more Observation An econ might live in a country experiencing rapid increases in prices and be moved by this observation to develop a theory of inflation The theory might assert that high inflation arises when the gov prints too much money o To test the econ could analyze and coolect data on prices and monet from many diff countries o If growth in the quantity of money were not at all related to the rate at which prices are rising, the econ could start to doubt the validity of this theory of inflation Experiments are difficult in econ Economist usually have to make do with whatever data the world happens to give them They pay close att to the natural experiments offered by history When economic crisis occurs the even provided an opportunity to study the effects of a key natural resource on the world’s econ. This persists long after crisis is over The Role of Assumptions Assumptions can simplify the complex world and make it easier to understand To study effects of international trade we can assume that the world consists of only two countries and that each country produces only two goods By assuming two countries and two goods we can focus our thinking on the essence of the problem Once we understand international trade in a small context we can understand it in a more complex one Economists use different assumptions to answer diff questions o Example pg 21 Use diff assumtions when studying the short-run and long-run effects of a change in the quantity of money Which of the following statements best represents the principle represented by the adage, "There is no such thing as a free lunch"? o Kendra must decide between going to Colorado or Cancun for spring break Economic Models Econ use models to learn about the world o Compose of diagrams and equations Econ models omit many details to allow us to see what is truly important Don’t use every feature of the economy All models built with assumptions Simplify reality to improve our understanding of it Our First Model: The Circular-Flow Diagram
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Need a model that explains how the economy is organized and how participants in the economy interact with one another A visual model of the economy that shows hoe dollaors flow through markets among households and firms Figure 1 (pg 23) o Economy simplified to include two types of decision makers—households and firms o Firms produce goods/services Use labor, inputs, land, capital Called factors of production o Households own factors of production and consume all the goods/services that firms produce Households/firms interact in 2 types of markets o Market for goods and services
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Chapter 2 notes - Chapter 2 notes Thinking like an...

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