ECN 001A Lecture Notes - Lecture 4: Full Employment, Opportunity Cost
LECTURE 4: 4/11/18
CHAPTER 2: THINKING LIKE AN ECONOMIST
• ECONOMIST AS SCIENTIST
o Economists play 2 roles:
▪ 1. Scientists: try to explain the world
▪ 2. Policy Advisors: try to improve it
o Economists employ the Scientific Method
▪ the dispassionate development and testing of theories about how the world works
• ASSUMPTIONS AND MODELS
o assumptions simplify the complex world, making it easier to understand
▪ Ex: to study international trade, assume 2 countries and 2 goods
• Unrealistic, but simple to learn and gives useful insights about real world
o Model: a highly simplified representation of a more complicated reality
▪ economists use models to study economic issues
▪ Circular-Flow Diagram: Model
• a visual model of the economy, shows how $$ flow through markets among
households and firms
• Two types of “actors”
o 1. Households:
▪ own the factors of production, sell/rent them to firms for income
▪ buy and consume goods and services
o 2. Firms:
▪ buy/hire factors of production, use them to produce goods and
services
• sell goods and services
• Two markets: goods and services, “factors of production”
o Factors of Production: the resource the economy uses to produce
goods and services
▪ Land (resources from nature: land, minerals, etc), labor, capital
(human, monetary, and physical: machines, buildings, factories
•
▪ Green arrows (to right): flows of income/payment
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ECN 001A Full Course Notes
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