Ch. 2 Flashcards
(15 cards)
Describe the usefulness and components of a circular flow diagram.
In this model, the economy is simplified to include only two types of decision makers – firms and households. Firms produce goods and services using inputs, such as labor, land, and capital (buildings and machines). These inputs are called the factors of production. Households own the factors of production and consume all the goods and services that the firms produce.
Households and firms interact in two types of market. In the markets for goods and services, households are the buyers, and firms are the sellers. In particular, households buy the output of goods and services that firms produce. In the markets for the factors of production, households are the sellers, and firms are the buyers. In these markets, households provide the inputs that firms use to produce goods and services. The circular-flow diagram offers a simple way of organizing the economic transactions that occur between households and firms in the economy.
Describe the usefulness and components of the production possibilities frontier model.
A graph that shows the various combinations of output that the economy can possibly produce given the available factors of production and the available production technology. The two endpoints of the production possibilities frontier represent these extreme possibilities. More likely, the economy divides its resources between the two industries, producing some of each product. Points on, rather than inside the production possibilities frontier represent efficient levels of production.
(remember one of the ten principles of economics in opportunity cost) The production possibilities frontier shows the opportunity cost of one good as measured in terms of the other good. Once we have reached an efficient point on the frontier, the only way of producing more of one good is to produce less of the other.
Points A and B are efficient, C is infeasible, and D is inefficient. The second model illustrates what happens when an economy grows. Society can move production from a point on the old frontier to a point on the new frontier. Which point it chooses depends on its preferences for the two goods.
What is microeconomics?
the study of how households and firms make decisions and how they interact in markets
What is macroeconomics?
the study of economy-wide phenomena, including inflation, unemployment, and economic growth
What is a positive statement?
claims that attempt to describe the world as it is
EX: “minimum-wage laws causes unemployment”
What is a normative statement?
claims that attempt to prescribe how the world should be
EX: “the government should raise minimum wage”
Compare positive and normative statements.
A key difference between the two is how we judge the validity. We can, in principle, confirm or refute positive statements by examining evidence. By contrast, evaluating normative statements involves values as well as facts. Deciding what is good or bad policy is not just a matter of science. It also involves our views on ethics, religion, and political philosophy.
What are the two basic reasons that economists so often appear to give conflicting advice to policymakers?
1) Economists may disagree about the validity of alternative positive theories of how the world works.
2) Economists may have different values and therefore different normative views about what government policy should aim to accomplish.
How are pie charts, bar graphs, and time-series graphs used in economics?
to graph single variables
What’s a useful way to graph two variables in economics?
Through a coordinate system.
Describe the usefulness of a demand curve.
Economists often prefer looking at how one variable affects another, holding everything else constant. (We now have three variables, to put the information in the table in graphical form, we hold one of the three variables constant and trace out the relationship between the other two).
Does correlation mean causation?
NO
What are the two roles of economists?
1) theoretical explanation
2) policy decisions
What is a direct incentive?
designed to have an immediate effect on resource users and influence returns to investment directly
EX: food stamps
What is an indirect incentive?
designed to change the relative costs and benefits of specific activities in an indirect way
EX: indirect compensation that employees receive like health insurance and retirement plans
