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ECN 211 (11)
Chapter 2

ECN 211 Chapter 2: Reading Notes: Chapter 2 - Thinking Like an Economist (2)
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Department
Economics
Course
ECN 211
Professor
Stefan Ruediger
Semester
Spring

Description
Mankiw Video: Why Economists Don't Need to Wear a Lab Coat • What makes you a scientist isn't about what you wear but how you think • Science- the study of how the world works • Scientist try to put aside their personal biases and values • Economics is not a natural science but a social science ◦ Applies the scientific method to understand the forces that govern society Chapter 2: Thinking Like an Economist • Terms apart of an economist's language ◦ Supply, demand, elasticity, comparative advantage, consumer surplus, deadweight loss, etc. Economist as a Scientist • Approaching the study of economy ◦ Devise theories, collect data, and then analyze the data in an attempt to verify or refute their theories • Scientific method- development and testing of theories about how the world works ◦ "The whole of science is nothing more than the refinement of everyday thinking" -Albert Einstein ◦ Conducting experiments is often impractical ‣ To find a substitute for lab experiments, economist pay close attention to the natural experiments offered by history • Ex. War in the Middle East interrupts flow of crude oil ◦ Economists study the effects of raised prices on the world's economics • Role of assumptions ◦ Assumptions can simplify the complex world and make it easier to understand ◦ Understanding something in a simplified world may make it easier to tackle on the complex world • Economic models ◦ Economists use models consisting of diagrams and equations ◦ All models simplify reality to improve our understanding of it ◦ Circular Flow Diagram- economy is simplified to include only two types of decision makers: firms and households ‣ A model that illustrates how the economy is organized and how participants in the economy interact with one another ‣ Firms- produce goods and services using inputs (labor, land, and capital [buildings and machines]); sellers • Factors of production- the inputs ‣ Households- use the factors of production and consume all the goods and services that the firms produce; buyers ‣ Outer arrows: shows the flow of dollars ‣ Inner arrows: shows the corresponding flow of input and outputs ‣ Households and firms interact in two types of markets • Markets for goods and services- households are buyers, firms are sellers • Markets for the factors of production- households are sellers, firms are buyers ‣ Ex. Begins at a household -> Buy a cup of coffee -> dollar goes to Starbucks -> becomes revenue -> firm uses it to buy
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