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Econ 202

by: Tanner Connelly

Econ 202 ECON 202

Tanner Connelly
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About this Document

Mod 2
Principles of Microeconomics
Christopher Donald Blake
Class Notes




Popular in Principles of Microeconomics

Popular in Economcs

This 2 page Class Notes was uploaded by Tanner Connelly on Monday February 8, 2016. The Class Notes belongs to ECON 202 at Colorado State University taught by Christopher Donald Blake in Spring 2015. Since its upload, it has received 18 views. For similar materials see Principles of Microeconomics in Economcs at Colorado State University.


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Date Created: 02/08/16
Module 2—Models and the Circular Flow  Ultimately, economists want to be able to explain what is going on in an economy. o To do this, we use models. o In this chapter we will talk about some of the simple models that form the basis of both micro and macroeconomics. Models Take Flight in Economics  Model—A simplified representation of reality that is used to better understand real­life  situations.  But why do we use simplified models? o Their simplicity allows economists to focus on the effects of only one change at a  time. o They allow us to hold everything else constant and study how one change affects  the overall economic outcome.  With all models in economics, we employ a very important assumption: ceteris  paribus. o Ceteris Paribus—A Latin phrase meaning “other things equal” o Example: What factors determine a person’s weight?  Age, gender, genetic history, diet, exercise, etc.  If we tried to describe this relationship all at once it would be far too  complicated, so we focus on just a single factor at a time  Take one of these and graph the relationship between the factor and  weight. This line holds everything else constant (all other relevant factors  remain unchanged).  Now, let’s begin our first model: the circular­flow diagram. The Circular­Flow Diagram  This model represents transactions that take place in an economy by two finds of flows  around a circle: o Flows of physical things such as goods, services, labor, and raw materials (these  go in one direction) o Flows of money to pay for those things (flows in the other direction) Figure: Circular Flow Diagram  In the Product Markets, households demand goods and services while firms supply goods and services.  What does this model miss? o No government, this is only a domestic economy o No financial markets  The model, despite its shortcomings, demonstrates one of the most important aspects of  an economy One Person’s Spending is Another Person’s Income  This is more important from a macro perspective and is something you’ll focus on in  ECON 204  However, this shows that we are all interconnected. When we decide to spend money,  we’re simultaneously making the decision to give someone income. o Therefore if someone loses their job and can thus not spend money, someone else  loses money through lost income and so on.


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