Chapter 2

Question 1

circular flow diagram

Answer 1

a visual model of the economy that shows how money and production inputs and outputs flow through markets among households and firms

Question 2

factors of production

Answer 2

Firms produce goods and services using inputs, such as labour, land and capital (buildings and machines). These inputs are called the factors of production.

Question 3

The production possibilities frontier

Answer 3

is a graph that shows the various combinations of output

Question 4

microeconomics

Answer 4

the study of how households and firms make decisions and how they interact in markets

Question 5

macroeconomics

Answer 5

the study of economy-wide phenomena, including inflation, unemployment and economic growth

Question 6

positive statements

Answer 6

statements that attempt to describe the world as it is

Question 7

normative statements

Answer 7

are statements about how the world should be