ECON 051 Lecture : Chapter 2 Notes_ Thinking Like An Economist
Chapter 2 Notes: Thinking Like An
Economist
The economist as scientist
The scientific method: observation, theory, and more observation
The role of assumptions
Economic models
Our first model: the circular-flow diagram
Circular-flow diagram: a visual model of the economy that shows how
dollars flow through markets among households and firms
MARKETS FOR GOODS
AND SERVICES
MARKETS FOR
FACTORS OF
PRODUCTION
Firms sell
Households buy
Households sell
Firms buy
Households
Firms
Produce and
sell goods and
services
Hire and use
factors of
production
Buy and
consume goods
and services
Own and sell
factors of
production
give
insight
o
economia
of
the
past
-
assumptions
made
for
:
•
simp
if
,
ing
complex
world
•
trace
it
easier
to
cinders
-
and
Different
as
sump
-
ions
to
answer
different
questions
Used
to
learn
about
the
world
>
models
are
built
w
assumptions
2
type
of
decision
makers
>
households
&
firms
shown
as
inns
:
Traduce
gs
using
inputs
-
factors
of
production
•
labor
,
land
,
É
,
capital
buildings
machines
-
Ouse
70
CS
:
o
n
he
fac
-
ors
of
sroduc
-
ion
&
consume
a
g
5
Ina
-
firms
Traduce
Ze
enue
5
>
ending
Goods
services
sold
sougnt
•
qq•
"
"
"
÷
-
•
•
•
←j-=_Kqod
.
fo
of
inputs
i.
and
outputs
Ho
-
f
ow
of
dollars
F-→E
Factors
of
sroduction
abor
,
and
,
&
capi
-
a
•
•
Mla
•
BBB
ages
,
rent
,
§
srofit
Our second model: the production possibilities frontier
Production possibilities frontier: a graph that shows the combination of
output that the economy can possibly produce given the available
factors of production and the available production technology
Quantity of
computers
produced
Quantity of
cars produced
Efficient IF economy is getting all it can from the scarce resources it has
available
Insufficient IF not using all its resources
-
Ouse
holds
firms
interact
in
2
markets
market
for
gs
:
households
=
buyers
firms
=
sellers
market
for
the
factors
of
production
households
=
sellers
provide
input
-
o
produce
gas
firms
=
buyers
>
will
never
be
feasible
•
C
3,000
•
-
2,200
•
-
7-
oduction
sossibiliti.es
2,000
•
B
frontier
1
,
000
•
)
•
-
0
300
600
700
1000
-
:
saints
on
cure
er
efficient
>
not
inside
-
:
goin
-
)
>
could
be
unetnp
lament
>
roductionsossibili-i.es
shows
rode
off
btwn
ou
-
ou
-
S
of
diff
.
goods
@
gi
en
ihre
rade
off
can
change
over
ime
