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ECN 204 (281)
Chapter 2

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ECN 204
Christos Shiamptanis

Chapter 2The Scientific Method Observation Theory and More ObservationsScientific Methodthe dispassionate development and testing of theories and how the world worksIn the field of economics there is a interplay between theory and observationExample The theory that high inflation arises when the government prints too much money o To test the theory economist can test the theory through collecting and analyzing data o When testing the theory economists have use the data the world happens to give themWhere scientists can perform many test and experiments to generate useful data o Economics pay close attention to natural experiments offered by historyThe Role of AssumptionsFor economists assumptions can simplify the complex world and make it easier to understandExample When thinking about international trade if we assume there are two countries in the world it is easier to focus our thinking which helps understand international trade in the more complex worldEconomists use different assumptions to answer different questionsEconomic ModelsEconomists uses models through diagrams and equations o Economic model omit many information to allow use to see what is importanto Economic models are built with assumptionsThe Circular Flow DiagramThe economy consists of millions of people engaged in many activities like buying sellin
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