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Chapter 2

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ECON 102
Maryann Vaughan

Thinking Like an EconomistThe Economist as ScientistEconomists play two rolesScientiststry to explain the worldPolicy advisorstry to improve itIn the first role economists employ the scientific method the dispassionate development and testing of theories about how the world works AssumptionsModelsAssumptions simplify the complex world make it easier to understandExample When studying international trade we might assume the world consists of two countries and two goods Very unrealisticbut simplifies the problem and yields useful insights about the more complicated real worldEconomists use models to study economic issuesA model is a highly simplified representation of a more complicated realityThe CircularFlow DiagramOur First Model The CircularFlow DiagramA visual model of the economy shows how dollars flow through markets among households and firmsIncludes two types of actorshouseholdsfirms Includes two marketsthe market for goods and services the market for factors of productionFactors of ProductionThe factors of production are the resources that the economy uses to produce goodsservicesThey includelabour land capital buildingsmachines used in production
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