CHAPTER+2

=Thinking Like an Economist =

Table of Content: 1. Title 2. Intro 3. Content 4. Conclusion 5. Glossary

by Elaine

You might not believe it, but economists are somewhat similar to scientists; they both use the //scientific method// - developing and testing theories about how the world works. To understand the large scope of economy, economists use simple graphs, that represent the general idea, to know how economy works around the world. *//Assumptions can simplify the complex world and make it easier to understand.//

First Model: The Circular-Flow Diagram


//Contextual Explanation//  So say you are a customer or a buyer in the market for goods and services. Let's look at the flow of dollars first. You spend $1 to buy a delicious cup of Mc Flurry with grinded Oreos. That $1 goes into McDonald's, the market for good and services. However, it doesn't stay there. That $1 you paid becomes the firm's revenue. With the revenue the firm earned, it pays off wages for the workers, rent for the place, and the rest become profit. When a firm hires or pays a worker or gives money for renting the place, or spends the money in any other capital input, that goes into the market for factors of production. In this market, households are sellers, and firms are buyers. Households provide the inputs that firms use to produce goods and services. AKA McDonald's buys workers and a location to settle in order to sell its products. They buy these factors of production from this market. So what happened to the money? Well, the money simply goes back to the households as income. The workers who make Mc Flurries at McDonald's gets a portion of that $1. The landlord gets a portion of that $1. The people who run McDonald's itself also gets a portion of that $1 as profit as well. Now, let's check out the flow of inputs and outputs. McDonald's is the seller of Mc Flurry and the us, the households, are the buyers. McDonald's and we interact in the market for goods and services. There, McDonald's sells the Mc Flurry and we gain it. But what do we, households, give in return to McDonald's? As mentioned before, in the market for factors of production, households, give labor, land, and capital to the firms, which eventually become factors of production. In this case, the firms buy labor by hiring people from households. They buy land from landlords, who are from other households. Later all that labor, land, and capital is contributed to the firms as factors of production. And the cycle continues on and on and on:] 
 * This diagram represents the general organization of the economy. The households and firms are interacting people in the economy.
 * Households and firms interact in the Markets for Goods and Services and Markets for Factors of Production
 * As you can see, the diagram shows how money is spent and gained and how it moves around the economy
 * Imagine a single product, just to make things easier to understand. __//MC FLURRY!//__

Second Model: The Production Possibilities Frontier

 * [[image:question12_15.gif align="right"]]The production possibilities frontier shows he overview of a fir and its combinations of output.
 * at first, the graph is only consisted of point F, C, and E.
 * Here, F, C, and E would be using all the resources given to you efficiently.
 * point G would be inefficient
 * point A,B,D, H would be infeasible
 * However say technology increased the production of good #1 (vertical).
 * That is how the frontier would shift
 * Now there are new efficient points

//Contextual Explanation //
Say you are producing Mc Flurries and keyboards. As a producer of many goods, you must decide how to distribute your resources in order to be most efficient. Now this is important, *Why does the frontier curve? It's because of the different opportunity cost. The most a good is produced the higher the opportunity cost. This is because of resource specialization. Once you produced a certain amount of good, you need to start using resources that aren't specialized for that good. So for example, resources used to produce Mc Flurries aren't used to make keyboards and vice versa. So when you're done using all your specialized resources for Mc Flurry you have to start using resources that make keybaords like plastic, which makes the opportunity cost way higher. Producing an additional Mc Flurry will mean a substantial loss of keyboards output. The opportunity cost of a Mc Flurry, is high, an the frontier is quite steep. Resources are scarce, and not very conceivable outcome is feasible. An outcome is said to be efficient if the economy is getting all it can from the scarce resources it has available, which is on the frontier. Once we have reached the effficient points on the frontier, the only way of getting more of one good is to get less of the other. 

Subfields of Economics
= = Microeconomics  study of how households and firms make decisions and how they interact in specific markets.  Macroeconomics <span style="font-family: 'Comic Sans MS',cursive; font-size: 126%;"> study of economy wide phenemona.
 * <span style="font-family: 'Times New Roman',Times,serif; font-size: 126%;"> A microeconomist might study the effects of rent control on housing in New York City, the impact of foreign competition on the U.S. auto industry, or the effects of compulsory school attendance on workers' earning.
 * <span style="font-family: 'Times New Roman',Times,serif; font-size: 126%;"> A macroeconomist might study the effects of borrowing by the federal government, the changes over time in the economy's rate of unemploymenyt or alternative policies to raise growth in national living standards.

<span style="color: #ff9400; font-family: 'Comic Sans MS',cursive; font-size: 150%;">Conclusion

 * Money and Goods/Services flow through a cycle in the economy. That is how the economy of a society works
 * Economists must consider opportunity costs when allocating resources
 * Economy essentially tries to achieve both efficiency and equity with balance
 * Microeconomics vs. Macroeconomics

<span style="color: #c0c0c0; font-family: 'Comic Sans MS',cursive; font-size: 150%;">__Glossary__ <span style="color: #000000; font-family: Arial,Helvetica,sans-serif;"> Circular-flow diagram- model of the economy showing how dollars and ood flow through firms and households Production possibilities frontier- graph that shows combination of outputs that the economy can produce given available factors of production Microeconomics- study of how housholds nad firms interact in a market Macroeonomics- study of economy in a larger-scope

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