Reading notes--Principles of Economics (chapter2)

Summary

Chapter 2 is Thinking Like an Economist. This chapter shows two kinds of economic models, some history stories about Economics and many examples to explain the way of how economists think.

Economic models

The circular-flow diagram

• You can see how dollars flow among households and firms in the economy.
• In the markets for goods and services, firms are sellers and households are buyers.
• In the markets for factors of production, firms are buyers and households are sellers.

The production possibilities frontier/curve

• This is a curve to explain opportunity cost, efficiency, inefficiency and unachievable.
• As the diagram shows, the points A,B and C stand for efficiency. The point X is inefficiency and the point Y is unachievable.
• The point A moves towards the point C means the opportunity cost of some cottons are some amounts of wines.

The way of economists think

The phenomenon of ticket resale.

Lawmakers sometimes try to prohibit reselling tickets, or “scalping” as it is sometimes called, in order to keep the ticket price low. However, many economists side with the scalpers rather than the lawmakers. They think the ticket price without scalping cannot show the real value of the ticket. The rule influences market force(the invisible hand).

• Laws that limit the resale of tickets for entertainment and sports events make potential audience members for those events worse off on average.

  Definitions

1. Circular-flow diagram– a visual model of the economy that shows how dollars flow through markets among households and firms

2. 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

3. Microeconomics– the study of how households and firms make decisions and how they interact in markets

4. Marcoeconomics– the study of economy-wide phenomena, including inflation, unemployment, and economic growth.

5. Positive statements– claims that attempt to describe the world as it is

6. Normative statements– claims that attempt to prescribe how the world should be

Review

I did all questions correctly! Excellent!