Microeconomics – Chapter 2
Economists devise theories, collect data, and then analyze the data in an attempt to verify or refute
their theories
The following are a few ways that an economists uses science procedures to asses an economy:
1. Observation theory, and more observation
§ Economists can only observe data that happened in the past and data that is currently going
on. They cannot “experiment” on an economy to get useful data.
2. The role of assumptions
§ Economists make assumptions in order to make a situation simpler and easier to
understand.
§ Economists use different assumptions when studying the short and long-run effects of a
change in the quantity of money.
3. Economic models
§ Economists use models to learn about the world, these models are composed of diagrams
and equations.
§ Models are built with assumptions
§ The circular-flow diagram:
Revenue Spending
MARKETS FOR GOODS
AND SERVICES
Goods and Goods and
services sold services bought
FIRMS HOUSEHOLDS
§ Produce and sell goods § Buy and consume
and services goods and services
§ Hire and use factors of § Own and sell factors of
production production
Factors of Labour, land,
production and capital
MARKETS FOR FACTORS
OF PRODUCTION
Wages, rent, Income
and profit
§ The 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
Economists devise theories, collect data, and then analyze the data in an attempt to verify or refute
their theories
The following are a few ways that an economists uses science procedures to asses an economy:
1. Observation theory, and more observation
§ Economists can only observe data that happened in the past and data that is currently going
on. They cannot “experiment” on an economy to get useful data.
2. The role of assumptions
§ Economists make assumptions in order to make a situation simpler and easier to
understand.
§ Economists use different assumptions when studying the short and long-run effects of a
change in the quantity of money.
3. Economic models
§ Economists use models to learn about the world, these models are composed of diagrams
and equations.
§ Models are built with assumptions
§ The circular-flow diagram:
Revenue Spending
MARKETS FOR GOODS
AND SERVICES
Goods and Goods and
services sold services bought
FIRMS HOUSEHOLDS
§ Produce and sell goods § Buy and consume
and services goods and services
§ Hire and use factors of § Own and sell factors of
production production
Factors of Labour, land,
production and capital
MARKETS FOR FACTORS
OF PRODUCTION
Wages, rent, Income
and profit
§ The 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
