Chapter 2

Chapter two is all about economics and how it relates to science. Economists make theories, observe and examine those theories and then make more theories based on what they find. Economists make assumptions to simplify things to look at. There are so many different goods and countries in the world it would be hard to keep track. However, economists will narrow it out to two countries and two goods to make comparisons with one another for their theories. Assumptions are also a big part of theories that are made. Just like scientists, economists use graphs and charts for demonstrative purposes. The circular flow diagram shows what might happen to a dollar that is put into the economy. There are firms and households. Households buy and consume goods and own and sell factors of production. Firms produce and sell goods and hire and use factors of production. They both put in and receive money from markets for goods and services as well as markets for factors of production. Another common graph is the production possibility frontier. This graph shows the production possibilities and the most efficient ways of production. Assuming a company sells two goods it shows the quantity of goods produced at highest efficiency on the frontier. Points beyond the line are not possible while points inside mean that the company is not selling at highest efficiency.