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Chapter 2

by: Fiona Coupe

Chapter 2 Economics 110

Fiona Coupe
GPA 3.668
Prin of Micro Economics
Harold Elder

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Prin of Micro Economics
Harold Elder
Study Guide
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This 4 page Study Guide was uploaded by Fiona Coupe on Friday January 23, 2015. The Study Guide belongs to Economics 110 at University of Alabama - Tuscaloosa taught by Harold Elder in Winter2015. Since its upload, it has received 270 views.


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Date Created: 01/23/15
Chapter 2 Thinking Like An Economist 21 THE ECONOMIST AS A SICENTIST Approach the economy by devising theories collecting data and then analyzing data 21a The Scienti c Method Observation Theory and More Observation Economist use theory and observation like other scientists but they cannot conduct experiments 0 Economists must pay close attention to experiments offered by history 21b The Role of Assumptions 0 Economist make assumptions to simplify the complex world making it easier to understand 0 Must decide which assumptions should be made 0 Different assumptions are made for different problems 21c Economic Models Studying models because of their lack of realism makes them simpler to comprehend 0 Models are usually diagrams and equations 0 All models are built with the assumptions 0 Simplify reality to improve our understanding of it 21d Our First Model The CircularFlow Diagram 0 We need a model to organize how the economy is organized and how participants in the economy interact with one another Circular ow diagramvisual model of the economy that shows how dollars ow among households and rms 0 Inputs are called factors of production MARKETS Sitarrue FEE GEES l tlll i EE 39ll39ilEES I Firms gall i llEaau emldi Emir HHME llil 39lllSaEI ll LD E I Filerium and sell Em and tonsume getE and selllimes goods and senlies Hire and use lamr5 i Himn and sell farm 31 pro1 militia 31 izlniitluttltm T sLTEl E MEEEETE FEiIFl FAETIIZI HE F lF 39ElIl C39lTI H quot39 H ll i htlsl ml MW art lit u naith Eli E Jr at ri ritiit an out l rs F can si allai39a Household and markets interact in two types of markets 0 Markets for goods and serviceshouseholds are buyers and rms are sellers 0 Markets for factors of production households are sellers rms are buyers 0 Inner loop of chart represents the ow of inputs and outputs Outer loop of chart represents the ow of dollars 21e Our Second Model The Production Possibilities Frontier 0 Production possibilities frontier graph that shows combination of output that the economy can possibly produce given the available factors of production and the available production technology uamity of Eramptutari mama 5 51 a F39 9 Hi 5 it 1 iii 333335 l WE 39f illEquot l3 521 Failquot 39l1i Quantt39 at Earls Fmdute Because resources are scarce not every conceivable outcome is foreseeable 0 An outcome is ef cient if the economy is getting all it can from the scarce resources it has available 0 Points on PPF show ef cient options 0 Points on the inside of PPF are inefficient PPF shows tradeoffs and opportunity costs scarcity efficiency 21f Microeconomics and Macroeconomics Microeconomicsstudy of how households and rms make decisions and how they interact in speci c markets Macroeconomics study of economywide phenomena 22 THE ECONOMIST AS POLICY ANALYSIS 0 When trying to explain the economy works as scientist when trying to improve it work as policy advisers 22a Positive versus Normative Analysis 0 Positive statements claims that attempt to describe the world as it is o Normative statements claims that attempt to describe the world how it should be 0 We can con rm or refute positive statements 0 Much of economies is positive but those who use it have normative goals 22b Economists in Washington o No economic decision is easy or clear cut because there is a tradeoff between efficiency and equality o Economists work all over the government form advising the president to congress to creating antitrust laws 22c Why Economists Advice in not Always Followed After the president is advised on the policies needed he must be advised on how it will be perceived 23 WHY ECONOMISTS DISAGREE Economists may disagree about the validity of alternative positive theories about how the world works Economists may have different values about what government policy should aim to accomplish 23a Differences in Scienti c luddments Often disagree because they have different hunches about the validity if alternative theories or about the size of important parameters 0 Some economists believe that taxing consumption would cause more savings and high standard of living 23b Difference in Values 0 Not everyone thinks it is fair to tax people the same way so people have different opinions 23c Perception versus Reality Economist do disagree but for the most part they agree on most things 24 LET S GET GOING Study of economics is simple but few truly succeed


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