Chapter+Two

= Chapter 2    = =    =  ==__<span style="color: rgb(0, 35, 255);"><span style="color: rgb(0, 0, 0);"><span style="color: rgb(0, 0, 0);"><span style="font-size: 110%; font-family: 'Comic Sans MS',cursive;"><span style="color: rgb(0, 0, 0);">Key Terms    __<span style="font-size: 110%; font-family: 'Comic Sans MS',cursive;"> ==

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<span style="font-size: 110%; font-family: 'Comic Sans MS',cursive;"> o<span style="font-size: 110%; font-family: 'Comic Sans MS',cursive;"> Circular-flow Chart: diagram that shows money flow between household and firms o Production possibilities frontier: graph that shows the combination of goods that could be produced o Microeconomics: studies interaction between households and firms in specific market o Macroeconomic: studies economic wide phenomena including inflation, unemployment and economic growth o Positive statement: states observation about the world o Negative statement: state supposition about the world

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<span style="font-size: 110%; font-family: 'Comic Sans MS',cursive;"> <span style="font-size: 110%; font-family: 'Comic Sans MS',cursive;"><span style="color: rgb(255, 0, 0);">Economist VS scientist?

Economist can be compared to a scientist. The reason for this comparison is that economists like scientists use scientific methods such as observation, theory, and more observation.

1. Role that theories and observation play in economics- Just as science, it is very important to develop a theory based on observation. For example, one of the Ten Principles of Economics states that growth of productivity of a nation determines growth of its average income. This theory was based on observation and data. Since economists cannot perform an experiment to test theory like law of gravity, they depend on history. We mostly learn from valuable lessons that economy of past give us.

2. By assuming and simplifying- Economy can involve a lot of complicated factors. By simplifying, we can enhance our understanding. If we are studying about international trade, it is much easier to understand if we suppose that there are two countries and two goods. We also use different assumptions to study the short-run and long-run effects of a change.

3. Economic Models Studying economy with models such as diagrams and equations often enhance our understanding.

4. The Circular-Flow Diagram

Source: http://images.google.co.kr/imgres?imgurl=http://www.culturaleconomics.atfreeweb.com

This diagram explains the flow of money through household and firms. There are two types of markets. The “market for goods and services” (Product market) is in which households buy the goods and services that firms supply. Firms have to pay for wage, rent, and interest. The “market for factors of productions” (Factor market) is where households are sellers of inputs to produce goods and households sell their labor, land, and capital.

Source: http://images.google.co.kr/imgres?imgurl=http://upload.wikimedia.org/wikipedia/commons/thumb/

<span style="font-size: 110%; font-family: 'Comic Sans MS',cursive;">This graph shows different combination of goods that a country can produce. Like its name, it shows possible production or combined quantity of two goods. For instance, let’s say that Korea can produce maximum of 130 guns but cannot produce any butter. Conversely, it can produce 100 butter, but no guns. This bow shaped curve is production possibilities frontier. The points on the curve (X,Y) is different combination of goods that could be produce. Point D and C are efficient points. A is inefficient because it means producing less than it could. X is an infeasible of unreachable point. The production possibilities frontier can shift outward or inward depending on technology advancement or unemployment respectively.

Source: http://images.google.co.kr/imgres?imgurl=http://www.eoearth.org/upload/thumb <span style="font-size: 110%; font-family: 'Comic Sans MS',cursive;">This graph shows a shift in the production possibilities frontier; a technological advance enables the economy to produce more, so it shifts outward. <span style="color: rgb(255, 0, 0);">

What are micro and macro economics?

Microeconomics is smaller scale study. It studies specific markets and what influences household and firm to have decisions. Ex) effects of rent control, impact of foreign competition on the U.S. auto industry, effects of school attendances on worker’s earning

Macroeconomics is study of economy as a whole, including inflation, unemployment, and economic growth Ex) federal government borrowing and policies to raise growth in national living standard.

<span style="color: rgb(255, 0, 0);"> Economists advise on policies

1. Positive and normative analysis Economists use positive and normative statements when they are advising. Positive statement is used when stating a solid fact. Normative statement is used when advising on something. Study of economics is positive, but when you want to improve economy, you use normative statements.

<span style="color: rgb(255, 0, 0);">Why Economists disagree Economists often do not agree on a policy and often give disparity of advice. Since they cannot test a theory or policy by experiments, they often say “on the other hand” and “however”. There are three main reasons why economists often disagree.

1. Differences in scientific judgment. They disagree about validity of a theory and its effects 2. Differences in values Economists have different ideas about fairness of the policy. They might support equal tax regardless of income. 3. Perception vs. reality There are times when economists agree, but they might not be able to convince the public that the policy would benefit them, so there is some politics involved in economy

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<span style="font-size: 110%; font-family: 'Comic Sans MS',cursive;"><span style="font-size: 110%; font-family: 'Comic Sans MS',cursive;"> • Economists are similar to scientists in that they base their theory on observation and data. By assuming and using models such as circular flow chart and production possibilities frontier economists make studies easier. • Micro and macro economics differ in that microeconomics study smaller scale of specific market and decision making of households and firms. Macroenomics study wider causes that affect economy drastically. • Economists use normative when they are advising and positive statements when studying • Economic advisers often disagree because of difference in judgment and value. Also, if they do agree, the policy might not enact it because of politics.

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<span style="font-size: 110%; font-family: 'Comic Sans MS',cursive;"><span style="font-size: 110%; font-family: 'Comic Sans MS',cursive;"> 1. List 3 methods that economists use to enhance their studies. 2. Explain factors of production and its impact on market. 3. What is infeasible point on the production possibilities frontier? 4. Give an example of micro and macro economics. 5. When do economist use normative statements? 6. Give two reasons why economists disagree.

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<span style="font-size: 110%; font-family: 'Comic Sans MS',cursive;"><span style="font-size: 110%; font-family: 'Comic Sans MS',cursive;"> 1. Economists use scientific methods such as observation and data. They use assumption to simplify complicated studies. Models such as circular flow diagram enhance their understanding 2. Factors of production are labor, land, and capital. They are what household sells and firms buy to produce goods and services. 3. Infeasible point is outside of the production possibilities frontier. It is point that cannot be reached without shifts in production possibilities frontier. 4. Microeconomics study effects on rent control while macroeconomics study unemployment 5. Economists use normative statements when they advise on a policy 6. Economists disagree because differences in judgments and values.

__<span style="font-size: 110%; font-family: 'Comic Sans MS',cursive;">Media __
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