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Flashcards in Ch. 2 Section Reviews Deck (12):

What are the two purposes for economic models?

Instruction and prediction of future events.


What advantage does a line graph offer over a tabular model?

The line graph provides significantly more data than the tabular model.


For an economist, what is the primary value of a production pos­sibilities curve?

A PPC enables the economist to see the maximum feasible amounts that a business can produce with its limited resources.


What does the circular flow model attempt to explain?

The circular flow model is a visual explanation of how a complete national economic system functions


What are the four factors of production?

Land, labor, entrepreneurship, capital


What four payments do business firms make in exchange for the factors of production?

Rent, wages, profit, interest


What are the four major entities in the circular flow model, and what is the primary role of each in the circular flow?

Households - principle purchasers of goods and services
Business firms - create goods and services
Government - purchase goods and services and provide transfer payments
Financial market - circulate money form households to business firms


What is the difference between financial capital and real capital?

Financial capital is money that is lent to business firms from households.
Real capital is the tools business firms use to produce goods and services.


What is the most important factor of production? Why?

Entrepreneurship. It directs, organizes, and plans the production process by coordinating the necessary land, labor, and capital.


Why is the financial market necessary for the effective function­ing of a developed society?

A financial market takes the savings of households and channels them to businesses so that the financial capital can help business firms operate effectively.


Explain what an economist means when he refers to the govern­ment as crowding out.

Crowding out occurs when the government borrows money from financial institutions thus making financial capital unavailable for businesses.


With what economic principle do we most often associate Ludwig von Mises?

Free Market