micro economics chapter 2
Microeconomics- study parts of the economy Macroeconomics- looking at economy overall
-Price of particular -Inflation, price analog
-Quantities sold of a particular good -Gross Domestic Product, GDP
-How individuals interact in a market -Interest rates -Unemployment Rates
I. The Economist as Scientist
A. Economists Follow the Scientific Method.
1. Observations help us to develop theory.
2. Data can be collected and analyzed to evaluate theories.
3. Using data to evaluate theories is more difficult in economics than in physical science because economists are unable to generate their own data and must make do with whatever data are available.
4. Thus, economists pay close attention to the natural experiments offered by history.
B. Assumptions Make the World Easier to Understand.
1. Example: to understand international trade, it may be helpful to start out assuming that there are only two countries in the world producing only two goods. Once we understand how trade would work between these two countries, we can extend our analysis to a greater number of countries and goods.
2. One important role of a scientist is to understand which assumptions one should make.
3. Economists often use assumptions that are somewhat unrealistic but will have small effects on the actual outcome of the answer.
C. Economists Use Economic Models to Explain the World around Us.
1. Most economic models are composed of diagrams and equations.
2. The goal of a model is to simplify reality in order to increase our understanding. This is where the use of assumptions is helpful.
D. Our First Model (The Book’s Second Model): The Production Possibilities Frontier
1. Definition of 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 production technology.
2. Example: an economy that produces two goods,
-Price of particular -Inflation, price analog
-Quantities sold of a particular good -Gross Domestic Product, GDP
-How individuals interact in a market -Interest rates -Unemployment Rates
I. The Economist as Scientist
A. Economists Follow the Scientific Method.
1. Observations help us to develop theory.
2. Data can be collected and analyzed to evaluate theories.
3. Using data to evaluate theories is more difficult in economics than in physical science because economists are unable to generate their own data and must make do with whatever data are available.
4. Thus, economists pay close attention to the natural experiments offered by history.
B. Assumptions Make the World Easier to Understand.
1. Example: to understand international trade, it may be helpful to start out assuming that there are only two countries in the world producing only two goods. Once we understand how trade would work between these two countries, we can extend our analysis to a greater number of countries and goods.
2. One important role of a scientist is to understand which assumptions one should make.
3. Economists often use assumptions that are somewhat unrealistic but will have small effects on the actual outcome of the answer.
C. Economists Use Economic Models to Explain the World around Us.
1. Most economic models are composed of diagrams and equations.
2. The goal of a model is to simplify reality in order to increase our understanding. This is where the use of assumptions is helpful.
D. Our First Model (The Book’s Second Model): The Production Possibilities Frontier
1. Definition of 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 production technology.
2. Example: an economy that produces two goods,