ECN 104 Lecture Notes - Lecture 2: Opportunity Cost, Natural Experiment
Document Summary
Scientific method: the dispassionate development & testing of theories on the workings of the universe. Since experiment is very difficult to conduct in economics, economists use historical events as natural experiment. E. g. decrease in housing sales after interest rate hike. Assumption is used to simplify complexity of the world. To study consumption behaviour, we may assume there are only 2 goods. Unrealistic, but will give a valuable insight on consumption behaviour. Economic model is an explanation of workings of an economic phenomenon, based on simplifying assumptions. Circular-flow diagram is a diagram that visualizes the organization of the economy. There are two types of decision makers: Factors of production are the inputs that are necessary for production such as land, labour, and capital. In the market for goods & services, households are buyers & firms are sellers. In the market for factors of production, households are sellers, firms are buyers.