ECON 102 Lecture Notes - Lecture 2: Opportunity Cost
Document Summary
Scientific method - dispassionate development and testing off theories about how the world works. Assumptions simply the complex world, making it easier to understand. Example: when studying international trade, we might assume the world consists of two countries and two goods. Model - highly simplified representation of a more complicated reality. Circular-flow diagram - visual model of the economy, shows how dollars flow through markets among households and firms. Households - own the factors of production, sell/rent them to firms for income. Firms - buy/hire factors of production, use them to produce goods and services. Outer line: household spends money in the markets for goods and services, receives goods and services, and then the money that they spend is now revenue for the firms. Firms, with that money, pay wages, rent, and profit for the markets for factors of production. Inner line: firms make goods and services and sell them in the markets for goods and services.
