Unit 1 (Nature and Method of Economics): Chapter 2

Question 1

A simple economic model introduced in economics to model cash flow

Answer 1

• circular flow diagram

Question 2

circular flow diagram

Answer 2

• decisions are made by households and firms
• households and firms interact in the markets for goods and services and in the markets for the factors of production

Question 3

production possibilities frontier

Answer 3

• a graph that shows the various combinations of output that the economy can possibly produce given the available factors of production and the available production technology that firms use to turn these factors into output

Question 4

microeconomics

Answer 4

study decision making by households and firms and the interaction among households and firms in the marketplace

Question 5

macroeconomics

Answer 5

study the forces and trends that affect the economy as a whole

Question 6

positive statement

Answer 6

an assertion about how the world is

Question 7

normative statement

Answer 7

an assertion about how the world ought to be

• when economists make normative statements they are acting as policy advisers (not scientists)

Question 8

Is economic advice always followed? Why or why not?

Answer 8

No because there could be differences in scientific judgements, differences in values, or the policy makers ignore it because of many forces and constraints imposed by the political process

Question 9

demand curve

Answer 9

traces the effect of a good’s price on the quantity of the good consumers want to buy

this is on a graph, and can be a line, not necessarily a curve

Question 10

reverse causality

Answer 10

misreading the direction of the cause (so if you think A caused B when really B caused A)