Economics chapter 2

Economists, like mathematicians, physicists, and biologists,

- make use of the scientific method. - try to address their subject with a scientist's objectivity. - devise theories, collect data, and then analyze these data in an attempt to verify or refute their theories.

Modes assume....

Away irrelevant details

How do economists test their theories?

By collecting and analyzing data

The goal of an economist that formulates new theories is to

Contribute to an understanding of how the world works

What obstacle do economists encounter?

It is difficult to perform experiments in economics

factors of production

Land, labor, and capital; the three groups of resources that are used to make all goods and services

Importance of circular flow chart

Leaves out details that are not essential for understanding the economic transactions that occur between households and firms

The opportunity cost of obtaining more of one good is show. On the PPF as the amount

Of the the other that must be given up

What leads to theories?

Real world observations

production possibilities frontier is used to illustrate

Scarcity, opportunity cost, economic growth

production possibilities frontier shows

The opportunity cost of producing one product or another

production possibilities frontier

a graph that shows the combinations of output that the economy can possibly produce given the available factors of production and the available production technology

Model

a simplified representation or abstraction of reality

circular flow diagram

a visual model of the economy that shows how dollars flow through markets among households and firms

The circular flow diagram

a visual model of the economy that shows how dollars flow(input and output) through markets among households and firms

A circular-flow model and production possibilities frontier are similar in that

both make use of assumptions

In the market for goods and services in the circular flow diagram,

firms provide households with output

For an economist, the idea of making assumptions is regarded generally as a

good idea, since doing so helps to simplify the complex world and make it easier to understand

Who owns the factors of production?

households, households are sellers in the markets for the factors of production

Unemployment would cause an economy to

produce inside its production possibilities frontier

Scientific Method

the dispassionate development and testing of theories about how the world works

The two loops in the circular-flow diagram represent

the flows of inputs and outputs and the flow of dollars.

The bowed shape of the production possibilities frontier can be explained by the fact that

the opportunity cost of one good in terms of the other depends on how much of each good the economy is producing. resources aren't adaptable

production possibilities frontier can shift outward if

there is a technological improvement

If an economy is producing efficiently, then

there is no way to produce more of one good without producing less of another good.

Economists as scientists

try to explain the world

Economists as Policy Advisors

try to improve the world

Because it is difficult for economists to use experiments to generate data, they generally must

use whatever data the world gives them