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Chapter 2

Chapter 2 - Thinking Like an Economist - ECN104 - Lecture Notes.docx

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Ryerson University
ECN 104
Eric Kam

ECN104- CHAPTER 2: Thinking Like an Economist September 11, 13  No assumptions = no models.  Assumptions simplify the complex world (studying int. trade between two countries instead of thousands)  Model: simplified example of a complicated reality. Economists use models to study economic issues  Economists employ the Scientific method: Dispassionate development and testing of theories about how the world works  With no assumptions comes only descriptions  Circular-Flow Diagram: model of the economy, shows how capital flows through markets along households and firms  Households: consume  Firms: Invest  Factors of production=Land, labor and capital (Buildings and machines used in production)  Land earns/pay rent  Labor earns /pay wages  Capital earns/pay interest  Households buy good/services to consume and sell factors of production to earn income  Firms sell good/services to earn income and buy factors of production to produce good/services  Tradeoff: Getting more of one good, in exchange for sacrificing some of the other  2 flows to be aware of: monetary and real (non-monetary)  PPF: co
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