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Chapter 2

Microeconomics Chapter 2 Textbook.docx

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Krishnakali Sen Gupta

Microeconomics: Chapter Two Thinking like an Economist Economists play two roles: 1. Scientists: try to explain the world 2. Policy advisors: try to improve it  In the first, economists employ the scientific method, the dispassionate development and testing of theories about how the world works. Assumptions and Models:  Assumptions simplify the complex world, make it easier to understand.  Example: To study international trade, assume two countries and two goods. (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. Circular Flow Diagram:  The Circular-Flow Diagram: a visual model of the economy, shows how dollars flow through markets among households and firms  Two types of “actors”:  households  firms  Two markets:  the market for goods and services  the market for “factors of production”  Factors of production: the resources the economy uses to produce goods & services, including  labour  land  capital (buildings & machines used in production)  The Production Possibilities Frontier (PPF): a graph that shows the combinations of two goods the economy can possibly produce given the available resources and the available technology  Example:  Two goods: computers and wheat  One resource: labour (measured in hours)  Economy has 50,000 labour hours per month available for production. The PPF: What we know about it so far Points on the PPF (like A and B)  possible  efficient: all resources are fully utilized
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