Chapter 2 Flashcards
(46 cards)
How is economics like a science?
Observe the world with objectivity, come up with theories, collect data to test the theories empirically
What type of experiment do economists typically use to test theories?
Natural experiments form real-world events
Why do economists make assumptions about the world?
The world is complex and has a huge number of intervening variables. Focusing on a few key variables to explain most of the picture in a simplified way is usually sufficient
For short-run vs long-run economic models, which variable often differs in its inclusion in the analysis?
elasticity. It can have great changes over time, but in a short period it can be very inelastic
What is the circular flow diagram?
A visual model of the economy that shows how dollars flow through markets
What are the two main actors in the circular flow diagram?
Firms and households
What are factors of production?
Inputs such as labour, land, and capital
In a circular flow diagram, what is the role of households?
They own the factors of production and consume all the goods and services that firms produce
In a circular flow diagram, what is the role of firms?
They produce goods and services using inputs (factors of production)
Where do households and firms interact in a circular flow diagram?
Markets for goods and services and markets for factors of production
What do household dollars represent as they wrap around the diagram?
Spending >revenue > wages, rent and profit > income back to households
What do the flow of household inputs and outputs represent as they wrap around the diagram?
Labour, land, and capital > factors of production > goods and services sold >goods and services bought
Who buys in the market for factors of production?
Firms
Who buys in the market for goods and services?
Households
The firm owners in a circular flow diagram correspond to which category? Firms or Households?
Households
What might a more complex and realistic circular flow diagram include?
the role of government and international trade
What is a production possibilities frontier?
A graph that shows the combinations of output that the economy can possibly produce given the available factors of production and available production technology
The economy can produce where on the production possibilities frontier?
At any combination on or inside the frontier
Why can an economy not produce at a point outside the production possibilities frontier?
It is not feasible given the economy’s resources. No matter what allocation of resources goes to the two goods, the level of output cannot increase.
What does the slope of the production possibilities frontier represent?
The opportunity cost of producing one good, in terms of another
Why does the slope of the production possibilities frontier vary?
It depends base don how much of a good the economy is producing
What are there three assumptions inherent in the production possibilities frontier?
1) The economy only produces two goods
2) At any time, the economy has a fixed stock of factors of production or inputs
4) at any time, the economy has a fixed state of technology available for production.
When is a production possibilities frontier efficient?
If the economy is getting all it can from the scarce resources available; any point on (rather than inside) the PPF are efficient
Why does the production possibilities frontier often have a bowed out shape?
When the economy is using most of its resources on one good, it likely includes resources that are not best-suited for it, so the marginal increase (opportunity cost) for each additional unit of the good increases
