Chapter 2 Flashcards
(25 cards)
Economic Models
Produced using the scientific method based on many assumptions used to simplify reality. (Imagine a scientist turning people in donkeys and then sorting them into lots based on color)
What are the four steps of the scientific method?
1) Observation.
2) Hypothesis (an explanation for the phenomenon)
3) Construct a model to test the hypothesis.
4) Design experiments to test how well the model works
(Imagine a rocket scientist observing a ufo. They form a hypothesis that the ufo must use an existing technology to work. They construct a model UFO to mimic the observed behavior. They test the model and determine that it cannot use existing technology)
Positive Statement
A statement that can be tested and validated. Can be thought as a statement of fact of “what is” (Imagine tacking an economics exam with only true false questions)
Normative Statement
Cannot be tested or validated; it is about what ought to be. (Imagine an invisible teapot floating around saturn)
What makes a good economic model
The model should be simple, flexible, and useful for making accurate predictions.(Imagine Galileo taking a miniature one punch man and dropping him next to a bowling ball off the tower of Pisa.)
ceteris paribus
“Other things being equal” The process in science of examining the change in one variable while holding everything else constant. (Imagine Harry Potter casting a spell and it only changes one feature on Snape’s face.)
endogenous factors
The factors than we know about and can control. (Imagine Endo from Gaki no tsukai doing algebra on the chalk board while wearing bdsm gear)
exogenous factors
Factors outside of our control. (Imagine your mother going crazy on your grandmother’s back lawn while screaming out mathematical gibberish)
Name the three factors in building an economic model
1) What we include in the model.
2) The assumptions we make when choosing what to include in the model.
3) The outside conditions that can affect the model’s performance.
(Imagine having to decide which people to take on a model space craft. You systematically decide who to include based on who you think you’ll need and consider what could happen if something goes wrong)
Production Possibilities Frontier (PPF)
A model that illustrates the combinations of outputs that a society can product if all of its resources are being used efficiently.
Efficient
When resources are being fully utilized and potential output is maximized.
Points beyond the possibility frontier
Desirable but not currently possible using current technology.
Points along the production possibility frontier
Society is using all of its resources int he most efficient way.
Points inside the ppf
Indicate inefficient use of societies resources.
Law of Increasing Opportunity Costs
States that the opportunity cost of producing a good rises as society produces more of it. Why? Not all resources are perfectly adapted to making pizza and wings. For instance, as society uses more workers to produce pizza the workers become increasingly less skilled.
Economic growth
Process that enables society to produce more of an output in the future.
How does economic growth look on the ppf?
Line shifts upward and to the right.
Specialization
Limiting of one’s work to a particular area.
Absolute Advantage
The ability of once producer to make more than another producer with the same quantity of resources.
Why can trade still product more output even when one worker has an ab solute advantage?
If the other worker has lower opportunity cost than the worker with an absolute advantage, even thought their output is inferior to the other worker, it makes it cheaper overall to produce more goods when each worker produces where then have a comparative advantage.
Short Run
The period in which we make decisions which reflect our immediate short-term wants, needs, or limitations. In the short run, consumers can partially adjust their behavior.
Long Run
The period in which we make decisions which reflects our needs, wants, limitations over a long time horizon. In the long run, consumers have time to fully adjust to market conditions.
Consumer goods
Goods that are produced for present consumption.
Capital Goods
Helps produce other valuable goods and services in the future.
