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Chapter 2

Chapter Two Lecture Notes.docx

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ECN 104
Frank Trimnell

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Alyssa Soubliere September 12 , 2013 Ryerson University ECN104 Lecture Notes # 2 ChapterTwo LectureNotes The Economist as Scientist: Economists play two roles: 1. Scientists- try to explain the world 2. Policy Advisors- try to improve it Economists use the “scientific method”, the dispassionate development and testing of theories about how the world works Assumptions and Models:  Assumptions: simplify a complex world, and make it easier to understand o E.g. when you study international trade, you assume two countries and two goods are being traded. This is an assumption, because it would be assumed that two countries would be equally contributing their goods with the other and that two countries would be needed to perform a trade.  Model: a highly simplified representation of a more complicated reality. Economists use models to study economic issues. Model One: The Circular-Flow Diagram  A visual model of the economy, shows how dollars flow through markets among households and firms  Two types of “actors” o Households o Firms Alyssa Soubliere September 12 , 2013 Ryerson University ECN104 Lecture Notes # 2 Model Two: 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  Examples: o Two goods: computers and wheat (fixed goods, and they remain the same) o One resource: labour (measured in hours) o Economy has 50,000 labour hours per month available for production Technological improvements allows the economy to produce more goods The Shape of the PPF:  PPF can be a straight line or bow-shaped  Depends on what happens to opportunity cost as
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