Chapter 2: Thinking Like and Economist

Question 1

Define ‘Circular-flow diagram’.

Answer 1

• A visual model of the economy that shows how dollars flow through markets among households and firms.
• They interact in the market for GOODS AND SERVICES (where households are buyers and firms are sellers) and in the market for FACTORS OF PRODUCTION (where firms are buyers and households are sellers).
• The outer set of arrows shows the flow of dollars, and the inner set shows the corresponding flow of inputs and outputs.

Question 2

Define ‘Production possibilities frontier’.

Answer 2

A graph that shows the combinations of output that the economy can possibly produce given the available factors of production and the available production technology.

Question 3

Define ‘Microeconomics’.

Answer 3

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

Question 4

Define ‘Macroeconomics’.

Answer 4

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

Question 5

Define ‘Positive statements’.

Answer 5

Claims that attempt to describe the world as it is.

Question 6

Define ‘Normative statements’.

Answer 6

Claims that attempt to prescribe how the world should be.