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Chapter 2

Microeconomics Idson Chapter 2 .docx

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Department
Economics
Course
CAS EC 102
Professor
Neil Watson
Semester
Fall

Description
EC 101 Microeconomics  Idson 2014 Chapter 2: Thinking Like an Economist  Background  ­ Economics is a science  ­ Economists are scientist o Devise theories o Collect data and analyze it to verify or refute theories  ­ Scientific method: Observation, theory and more observation  ­ Conducting experiments are difficult or impossible  ­ Observation: close attention to natural experiments The Role of Assumptions  ­ Assumptions can simplify the complex world and focus our thinking to find the  essence of the problem. ­ Different assumptions: To answer different questions  o Short­run or long­run effects  Economic Models ­ diagrams and equations  ­ omit many details so they allow us to see what’s truly important  ­ built with assumptions  ­ simplify reality to improve our understanding of it  Circular­flow diagram  ­ visual model of the economy ­ shows how dollars flow through markets among households/firms  o Decision makers: firms and households  Firms: produce goods/services, use factors of production/inputs   Households: own factors of production and consume  goods/services o Markets: for goods/services and factors of production   Markets for goods/services  • Firms – sellers • Households – buyers   Markets for inputs  • Firms – buyers  • Households – sellers  Circular Flow Diagram  Production Possibilities Curve (PPC) ­ Combinations of output that the economy can possibly produce given the  available factors of production and technology  ­ Efficient levels of production o The economy is getting all it can from the scarce resources available.  o Trade off: the only way to product more of one good is to produce less of 
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