Principles of Microeconomics Chapter 2

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Department
Economics
Course
ECON 1116
Professor
Irena Tsvetkova
Semester
Spring

Description
Principles of Microeconomics Chapter 2 Economists play 2 roles 1. Scientists: try to explain the world 2. Policy makers/advisors: try to improve the world st In the 1 , economists employ the scientific method: the dispassionate development and  testing of theories about how the world works ­ Assumptions: Simplify the complex world, make it easier to understand ­ Ex: To study consumer behavior, assume that one consumer chooses between 2 goods o Unrealistic but simple to learn and gives useful insights about the real  world Model: A highly simplified representation of a more complicated reality ­ Economists use models to study economic issues Microeconomics: The study of how households and firms make decisions and how they  interact in markets Macreconomics: The study of economy­wide phenomena, including inflation,  unemployment, and economic growth The Circular Flow Diagram ­ It is a visual model of the economy and shows how dollars flow through markets  among households and firms ­ 2 types of actors/decision makers: Households and firms ­ 2 markets:  o Output market: Market of goods and services o Input market: Market for “factors of production” ­ Factors of Production: the resources the economy uses to produce goods and services,  including… 1. Labor 2. Land 3. Capital (buildings and machines used in production) Households Firms ­ Own the factors of production, sell/rent  ­ Buy/hire factors of production, use
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