1.3 How Economists Use Theories and Models to Understand Economic Issues

Question 1

How do economists analyze issues and problems?

Answer 1

Using economic theories that are based on particular assumptions about human behavior

Question 2

What is the purpose of a theory?

Answer 2

To take a complex real world issue and simplify it down to its essentials

Question 3

A ______ is a simplified representation of how two or more variables interact with each other.

Answer 3

Theory

Question 4

A _____ is simple enough to understand, while complex enough to capture the key features of the object or situation you are studying.

Answer 4

Good Theory

Question 5

A ____ is a more applied or empirical representation of how two or more variables interact with each other.

Answer 5

Model

Question 6

What does a “circular-flow diagram” show?

Answer 6

Shows how households and firm interact in the goods and services market, and in the labor market.

Question 7

Market in which firms sell and households buy.

Answer 7

Goods and Services Market

Question 8

Market in which households sell labor to business firm or other employees.

Answer 8

Labor Market

Question 9

How do households in the labor market receive payment?

Answer 9

Wages
Salaries
Benefits

Question 10

How do economists use theories to solve problems.

Answer 10

• They go through the theories they know to see if one fits

- Using a theory to derive insights about the issue or problem

Question 11

Economists use the _______ of a theory to help them figure out the answer.

Answer 11

Graphs