ECON 201 1st Edition Lecture 3 Outline of Last Lecture I. Announcements and RemindersII. What Economics is All Abouta. Definition of scarcity b. Definition of economicsIII. Managing Scarce Resourcesa. Four questions of management IV. Economic Systemsa. Three types of economic systemsOutline of Current Lecture I. Characteristics of a Market Economic SystemII. Economic FreedomIII. Elements of the Circular Flow Modela. Definition of circular flow modelb. Definition of factors of productionIV. Assumptions of the Circular Flow Modela. Definition of deductive reasoningV. The Circular Flow ModelVI. Elements of Economicsa. Definition of macroeconomicsb. Definition of microeconomicsVII. The Roles of an EconomistCurrent LectureI. Characteristics of a Market Economic SystemAs mentioned in the previous lecture, there are many elements of a market economic system. These include division of labor, specialization, economies of scale, trade, and the notion of an “invisible hand”. The term “invisible hand” was created by Adam Smith and is used to represent the idea of decentralized decision making in an economy. An additional characteristic of the market economic system is the organization of economic activity through prices.II. Economic FreedomA comprehensive list of countries and their rank regarding economic freedom can be found at this website: http://www.heritage.org/index/. Last semester, the United States was ranked as one of the top 10 countries with economic freedom; as of the beginning of the semester, it is These notes represent a detailed interpretation of the professor’s lecture. GradeBuddy is best used as a supplement to your own notes, not as a substitute.#12 on the list. However, the numerical ranking for any country is not as important as the trend (whether it is ascending or descending on the list). The trend analysis is more important and more credible than the numbers in any economic figure. - Ultimately, there are varying degrees of economic freedom within a system. III. Elements of a Circular Flow ModelTo understand how a market economic system runs, we use a basic model called the Circular Flow Model. A circular flow model is a visual model of the economy that shows how dollars flow through the markets among households and firms. This model is a simplified representation of the economy overall. In this model, there are two types of “players”: households and firms. These players will interact in two markets: the Market for Goods and Services (G & S) and the Market for Factors of Production. Factors of production are resources the economy uses to produce goods and services. Examples of these are land/natural resources,labor, and capital. There can be more factors of production depending on how you define them, but for the purpose of this class we only have three. IV. Assumptions of the Circular Flow ModelIt is important to understand how the model is built and what assumptions are made about it sothat one can tell where its strengths and weaknesses lie. Two ways are used to build theories and models, and these are deductive reasoning and inductive reasoning. Deductive reasoning uses simplifying assumptions and this is the one that is often used by the hard sciences in the scientific method. Deductive reasoning is what we will be using to build the circular flow model. Assumptions simplify the complex world and drive everything in economics, and there are manyassumptions in the circular flow model. The biggest assumption of the model is that householdsown all factors of production (land, labor, and capital) and sell or rent them to firms for income. Additionally, households buy and consume goods and services and this is the role we assume they have. Firms buy or hire factors of production from the households, and use them to produce and sell goods and services to the households. This is all explained more clearly in the model below.V. The Circular Flow ModelThe Gross Domestic Product (GDP) is a way of gauging the health of an economy. Using the circular flow model, there are two perspectives of the GDP: the expenditure approach and the income approach. The expenditure approach is the top half of the diagram, while the income approach is the bottom half.VI. Elements of EconomicsTo recap, economics is the study of how a society manages its scarce resources. Two elements of economics are macroeconomics and microeconomics. Macroeconomics is the study of economy-wide phenomena while microeconomics focuses on individual decision makers. VII. The Roles of an EconomistEconomists play two roles in their jobs: that of a scientist and that of a policy advisor. As a scientist they attempt to explain the world using the scientific method. With respect to the economy, they determine what happened in the past, what is happening now, and what will happen in the future. As a policy advisor, they try to improve the current economic situation and plan for what they predict will