Chapter2+JDEM



==== //Chapter 2 will help you look in the perspective of an economist. This chapter is the threshold to all application strategies you will learn to use in later chapters. However, keep in mind that these are again, like Chapter 1, merely building blocks of Microeconomics. As an economist, you will be asked to utilize the scientific method, the role of assumptions in model building, and application of two possible economic models. Economist try to explain the world of economics, but also strive to improve the the economic world as policymakers.// ====

**Economic Models**
====Economic models are diagrams and equations used to represent the economy. These omit details and only show what is important or relevant to what is being show. Economic models are built with assumptions, and don't include every feature of the economy.====

**Macro vs. Microeconomics**
====Micro economics is the study of how households and firms make decisions and how they interact in markets. Macro economics is the study of economy-wide phenomena, including: inflation, unemployment, and economic growth.====

__CONCEPTS__
= **How do economics come to conclusions?** = ====Economists devise theories, collect data, and analyze data in an attempt to refute/verify theories. The scientific method is used to explain theories through observation. The scientific method's interplay between theory & observation also exists in economics. HOWEVER //experiments are difficult in economics because variables (such as money) cannot be manipulated.// Therefore, economists must use historical examples and data given to make assumptions.====

Economists use assumptions to simplify the complex world. Assumptions will differ based on how long we study something (long term/short term). Economic models are the result of such assumptions.
= What is a Circular Flow Diagram, What does it show? =

Households:
====Households are comprised of the 'consumers' of a market. They sell factors of production (labor, land, capital, etc.) and buy products from markets. Ex: A person works at Kmart (sells labor), and uses their wages to buy a Wii (buys product).====

Factor Market (Market for factors of production):
====Households sell factors of production to firms through the factor market. Firms buy factors of production through the factor market. In return, households receive money for their factors of production (wages, rent, interest, profit) and firms pay for factors of production (costs).====

Product Market (Market for goods and services):
====Businesses produce goods and services then sell them through the product market. Households buy products through the product market. In return, firms receive revenue for the products they sell and households give up money through consumption expenditure (the money they use to buy the products).==== = What is a production possibilities frontier, what does it show? =

====The production possibilities frontier is a graph that shows the combination of output that the economy can possibly produce given the available factors of production and the available factors of production technology.==== ====An outcome is said to be efficient if the point lies on the outermost line of the graph. A point on this line means that the economy is utilizing all of its resources. The graph will shift when production capability changes.==== ====The PPF graph is bowed because resources are specialized. A resource (such as labor) might be better suited to producing good A instead of good B. In that case, the resource would contribute a higher level of production when it was used for making good A, but the productivity of the resource would drop if it were used to make good B.====

Point Y: This point is one that cannot be feasibly reached by the market. Points such as point Y may be possible through advancements in technology or trade with others.
====Point X: More resources are being used towards the production of good B than good A. However, because this point is not on the PPF curve, it is said to be inefficient, because that point is not utilizing all the resources that the market can offer.====

= Why do Economists Disagree? =

====Because economists must use historical examples and current data to come to conclusions, they disagree on the validity of possible theories. They may also disagree because of different values and ideas about policy objective (Economic policies made by Washington).====

It has already been explained that economics is the study of scarcity- and how parties will make decisions to make up for that fact that limited resources cannot meet their unlimited wants. However, since economics is an ongoing subject (the study of something that is constantly changing, even now), and because there are factors beyond the control of a single individual, it is hard to economists to make 'rock solid' conclusions. As a result they resort to measures such as assumptions and making normative/positive statements. Many of these conclusions are drawn from the basic relationship between firms and household, the main parties in any economy.



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= Glossary =


 * Circular Flow diagram:
 * A visual model of the economy that shows how dollars flow through markets among households and firms.
 * Production Possibilities frontier:
 * A graph that shows the combinations of output that the economy can possibly produce given the available factors of production and the available factors of production technology.
 * Microeconomics
 * the study of how households and firms make decisions and how they interact in markets
 * Macroeconomics
 * the study if economy-wide phenomena, including inflation, unemployment, and economic growth.
 * Positive statements:
 * claims that attempt to describe the world as it is
 * Normative statements:
 * claims that attempt to prescribe how the world should be.