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Lecture 2

ECON 1000 Lecture Notes - Lecture 2: Opportunity Cost, Scientific Method

Course Code
ECON 1000
Paul Haddow

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Chapter 2: thinking like an economist
Economics: the scientific method
the scientific method involves observation, theory, and more observation
economists use theory and observation like other scientists, but they do face an obstacle
that makes their task challenging: experiments are often difficult in economics
like other scientific areas, economists use models to learn about the world
- most often composed of diagrams and equations
- by making simplifying assumptions, models omit many details to make the world easier to
understand and to allow us to see what is truly important
key is deciding which assumptions to make
first model: the circular flow
includes two types of decision makers- households and firms
inner loop represents the flow of inputs and outputs
outer loop represents the flow of dollars
factors of production:
- they are used to produce goods and services
- use inputs such as labor, land(natural resources), and capital
firms and households interact in two types of markets
1. market for goods and services
firms provide households with the output they produced for factors of production
households provide firms with labor, land, capital
second model: the production possibilities frontier
a point on a country’s production possibilities frontier represent a combination of two
goods that an economy can produce using all available resources and technology
production possibilities frontier usually are bowed outward because resources are
specialized; that is, some are better at producing particular goods rather than other
opportunity cost stays constant or constant tradeoffs, then production possibilities frontier
is a straight line
region of the point outside the production possibilities frontier is not feasible because the
economy simply doesn’t have enough of the factors of production to support that level of
region of the point inside the production possibilities frontier is feasible but not efficient
because economy is producing less than it could from the resources it has available
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