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Chapter 2

Chapter 2 - Thinking Like and Economist

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Bridget O' Shaughnessy

thEconomics Textbook Notes February 4 2012Chapter 2Thinking Like an Economist The economist as scientistEconomists try to address their subject with a scientists objectivityThey devise theories collect data and then analyze these data in an attempt to verify or refute their theories Scientific methodthe dispassionate development and testing of theories about how the world worksCircular flow diagram Circular flow diagram a visual model of the economy that shows how dollars flow through markets among households and firms Factors of production labor land natural resources and capital buildings and machines Firms input factors of production to produce goods and servicesHouseholds own the factors of production Markets for goods and serviceshouseholds are buyers and firms are sellers Markets for the factors of productionhouseholds are sellers and firms are buyersThe inner loop of the circular flow diagram represents the flows of inputs and outputsThe households sell the use of their labor land and capital to the firms in the markets for the factors of productionThe firms then use these factors to produce goods and services which in turn are sold to households in the markets for goods and services The outer loop of the circular flow diagram represents the corresponding flow of dollarsThe households spend money to buy goods and ser
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