ECN204 Notes Chapter 2.doc

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22 Oct 2012

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ECN204 NotesChapter 2
Economists play two roles
oScientists – try to explain the world
Scientific Method – dispassionate development and testing of
theories about how the world works
Make positive statements (attempt to describe the world as it is)
Can be confirmed and/or refuted
oPolicy Advisors – try to improve it
Make normative statements (attempt to prescribe how the world
should be)
Cannot be confirmed and/or refuted
oUnrealistic, simple to learn, gives useful insights about the real world
oModel – a highly simplified representation of a more complicated reality
(used to study economic issues)
oStudy of how households and firms make decisions and how they
interact in markets
oStudy of economy-wide phenomena (e.g., inflation, unemployment,
economic growth, etc.)
Why Economists Disagree
oOften give conflicting policy advice
oSometimes disagree about the validity of alternative positive theories
about the world
oMay have different values, therefore different normative views about
what policy should try to accomplish
oMany propositions about which most economists agree
Chapter Summary
oAs scientists, economists try to explain the world using models with
appropriate assumptions
oTwo simple models are the Circular-Flow Diagram and the Production
Possibilities Frontier
oMicroeconomics studies the behaviour of consumers and firms, and their
interactions in markets. Macroeconomics studies the economy as a
oAs policy advisors, economists offer advice on how to improve the world
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