ECN 104 Lecture Notes - Lecture 2: Opportunity Cost, Canadian English, Substitute Good
Document Summary
Market economy - one that allocates resources through the decentralized decisions of firms and households. Households decide what to buy and who to work for. Firms decide who to hire and how much to produce. Command/centrally planned economy one where all production and distribution decisions are made by a central authority, like a government. Mixed economy combination of command and market economy. Scientific method: dispassionate development and test of theories about how the world works. Assumptions simplify the comples world, make it easier to understand. To study international trade, assume two countries and two goods. Unrealistic but simple to learn and gives useful insights about the real world. Model: a highly simplifies representation of a more complicated reality. Economists use models to study economic issues. Circular- flow diagram a visual model of the economy, shows how dollars flow through markets among households and firms. Two markets: the market for goods and services; the market for factors of production.
