Microeconomics Chapters 1-3

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Markets
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a group of buyers and sellers with the potential to trade with one another
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Aggregation
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the process of combining distinct things into a single whole (general whole) EX: all computers, all laptops
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Circular Flow
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a simple model that shows how goods, resources, and dollar payments flow between households and firms
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Product Market
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markets in which firms sell goods and services to households
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Resource Market
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markets in which households that own resources sell them to firms
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Imperfectly Competitive Market
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markets where individual buyers or sellers can control or influence the price
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Perfectly Competitive Market
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markets where NO buyer or seller has the power to influence the price -each buyer and seller has the market price as given
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Quantity Demanded
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the quantity of a good that all buyers in a market would choose to buy during a period of time, given their constraints
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The Law of Demand
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as the price of a good increases, the quantity demanded decreases; when price falls, quantity rises -CETERIS PARIBUS: when everything else (all other influences) remain unchanged
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Ceteris Paribus
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Latin expression for \”all else remaining the same\” -when everything else (all other influences) remains unchanged
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Demand Schedule
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a list showing the quantities of a good that consumers would choose to purchase at different prices, with all other variables held constant
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Demand Curve
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a graph of a demand schedule -a curve showing the quantity of a good or service demanded at various prices, with all other variables held constant -downward slope
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Shifts of Demand Curve
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a change in any variable that affects demand (except for price) -Change in Demand
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Movements Along Demand Curve
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increase or decrease in price -Change in Quantity Demanded
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Change in Quantity Demanded
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a movement along a demand curve in response to a change in price
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Change in Demand
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a shift of a demand curve in response to a change in some variable other than price
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Income
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the amount of $ that a person or firm earns over a particular period
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Normal Goods
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a good that people demand more of as their income rises
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Inferior Goods
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a good that people demand less of as their income rises
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Wealth
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the total value of everything a person or firm owns, at a certain point in time, minus the total amount owed
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Substitute
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a good that can be used in place of some other good and that fulfills more or less the same purpose EX: using jam; not honey -increase–>shifts demand curve right
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Complement
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a good that is used together with some other good EX: pancake mix and maple syrup -increase–>shifts demand curve left
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Facts that Shift the Demand Curve
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-income -wealth -prices of related goods -population -expected price -tastes -other shift variables
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Quantity Supplied
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the specific amount of a good that all sellers in a market would choose to sell over some period, given their constraints
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Law of Supply
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as the price of a good increases, CETERIS PARIBUS, the quantity supplied increases -opposite of Law of Demand
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Supply Schedule
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a list showing the quantities of a good or service that firms would choose to produce and sell at different prices, with all other variable held constant
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Supply Curve
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a graph of a supply schedule, showing the relationship between the price of a good and the quantity supplied int he market (at various prices) -each point represents the quantity that sellers would choose to sell at a specific price -upward slope
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Change in Quantity Supplied
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a movement along a supply curve in response to a change in price
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Change in Supply
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a shift of a supply curve in response to a change in some variable other than price
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Factors that Shift the Supply Curve
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-input prices -price of alternatives -technology -# of firms -expected price -changes in weather and natural events -other shift variable
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Alternate Goods
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other goods that firms in a market could produce instead of the good in question EX: making maple sugar or wood instead of maple syrup
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Alternate Market
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a market other than the one being analyzed in which the same good could be sold
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Technological Advance
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occurs in production when a firm can produce a given level of output in a new and cheaper way than before
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Equilibrium Price and Equilibrium Quantity
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values for a price and quantity in the market that once achieved will remain constant–unless and until the supply curve or demand curve shifts
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Excess Demand
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at a given price, the amount by which quantity demanded exceeds quantity supplied -buyers would compete to get more good available and would offer to pay a higher price -causes prices to rise
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Excess Supply
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at a given price, the amount by which quantity supplied exceeds quantity demanded -sellers would compete to sell more goods than buyers wanted to buy, and price would fall -causes prices to decrease
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Equilibrium on a Graph
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where the 2 curves cross
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3-Step Process
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1. characterize the market 2. find the equilibrium 3. what happens when things change
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Production Possibilities Frontier (PPF)
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a curve showing all combinations of 2 goods that can be produced with the resources and technology currently available
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Law of Increasing Opportunity Cost
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the more of something we produce, the greater the opportunity cost of producing even more of it -causes the PPF to have a concave shape,
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Productive Inefficiency
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a situation in which more of at least one good can be produced without sacrificing the production of any other goods -puts us inside our PPF
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Recessions
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a slowdown in overall economic activity -why an economy might operate inside a PPF
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Economic System
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the way our economy is organized
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Specialization
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a method of production in which each person concentrates on a limited # of activities
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Exchange
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the act of trading with others to obtain what we desire
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Comparative Advantage
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the ability to produce a good or service at a lower opportunity cost than other producers
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Absolute Advantage
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the ability to produce a good or service using fewer resources than other producers use
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Resource Allocation
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deciding how society’s scarce resources will be divided among competing claims and desires
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3 Types of markets
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-traditional -command -market
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Traditional Economy
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an economy in which resources are allocated according to long-lived practices from the past -stable/predictable economies, but stagnant economies
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Command (Centrally Planned) Economy
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an economic system in which resources are allocated according to explicit instructions form a central authority -bad
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Market Economy
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an economic system in which resources are allocated through individual decision making -most popular
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Market
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a group of buyers and sellers with the potential to trade with each other
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Price
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the amount of $ that must be paid to a seller to obtain a good or service -not the same as cost
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Market Capitalism
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-complete label for market economies -refers to one way that resources are owned -CAPITALISM (private) and SOCIALISM (state)
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Invisible Hand
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private resource owners are guided by an \”invisible hand\”
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Mixed Economy
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a market economy in which the government also plays an important role in allocating resources
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Sunk Cost
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price \”sunk\” over a decision
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Economics
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the study of how people choose/make decisions about how to use resources under conditions of scarcity :study of choices related to production and distribution
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3 Branches of Microeconomics
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-Certainty and rationality ( Neoclassical Microeconomics) -Uncertainty derived from imperfect information (Institutional Economics) -Uncertainty derived from irrationality (Behavioral Economics)
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Keynesian Microeconomics
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?
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Resources
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inputs that can be used to produce goods/services -land/natural resources, labor, capital, entrepreneurship
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Scarcity
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results from competing uses
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Opportunity Cost
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measures the value of benefits associated with the path not taken -the value of resources used to generate benefits in the path not taken -the consequence of tradeoff, forced into a choice by scarcity
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Opportunity Cost=
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Explicit cost + Implicit cost
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Sunk Cost
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costs that have already been born -cannot be changed making them -irrelevant to decision and as a resold -should be ignored
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Marginal Cost
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-Incremental cost -the change in costs associated with the change in whatever we’re doing
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Incremental Cost
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change in cost (and benefits) when we decide to use our resources differently
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Economics
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the study of choice under conditions of scarcity
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Scarcity
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a situation in which the amount of something available is insufficient to satisfy the desire for it
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Opportunity Cost
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what is given up when taking an action or making a choice -the next best option
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Explicit Cost
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the $ sacrificed (and actually paid out) for a choice
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Implicit Cost
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the value of something sacrificed with no direct payment is made
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The Four Resources
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-Labor -Capital -Land -Entrepreneurship
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Resources
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the labor, capital, land, and entrepreneurship that are used to produce goods and services
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Labor
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time humans spent producing goods and services
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Capital
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any long-lasting tool that is itself produced and helps us make other goods and services
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Physical Capital
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the part of the capital stock consisting of physical goods (machinery, equipment, factories)
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Human Capital
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the skills and training of the labor force
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Capital Stock
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the total amount of capital in a nation that is productively useful at a particular point in time
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Land
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the physical space on which production takes place, as well as the natural resources that come with it
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Entrepreneurship
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the ability and willingness to combine labor, capital, and clans into a productive enterprise
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Individual opportunity cost arises from…
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scarcity of time and money
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Society’s opportunity cost arises from…
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scarcity of resources
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Microeconomics
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the study of the behavior of individual households, firms, and governments; the choices they make; and their interaction in specific markets
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Macroeconomics
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the study of the behaviors of the overall economy
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Positive Economics
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the study of how the economy works
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Normative Economics
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the practice of recommending policies to solve economic problems
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Why do economists disagree about policy?
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-disagreement is based on positive economics (our knowledge of how the economy works is imperfect)
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Why study economics?
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-to understand the world better -to achieve social change -to help prepare for other careers -to become economists
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Models
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an abstract representation of reality
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Simplifying Assumption
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any assumption that makes a model simper without affecting any of its important conclusions
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Critical Assumption
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any assumption that affects the conclusions of a model in an important way

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