chapter 2) Thinking Like an Economist: Microeconomics, Macroeconomics, and Economic Models

Vocabulary flashcards covering fundamental economic concepts, the scientific method in economics, positive vs. normative analysis, the Circular-Flow Diagram, and the Production Possibilities Frontier (PPF).

Microeconomics

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

Macroeconomics

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

Scientific Method

The dispassionate development and testing of theories about how the world works, relying on observation, theory formulation, and natural experiments rather than laboratory experiments.

Positive Statements

Descriptive claims about how the world is, which can be confirmed or refuted by examining evidence.

Normative Statements

Prescriptive claims that attempt to prescribe how the world should or ought to be, evaluated using values as well as facts.

Council of Economic Advisors

A government agency that provides policy advice to the U.S. President, chaired from 2003 to 2005 by the textbook author.

Model

A highly simplified representation of a more complicated reality, constructed using assumptions to make complex economic issues easier to study and understand.

The Circular-Flow Diagram

A visual model of the economy that shows how dollars flow through markets among households and firms.

Factors of Production

The resources the economy uses to produce goods and services, which include labor, land, and capital.

Capital

The buildings and machines used in the production of goods and services.

Production Possibilities Frontier (PPF)

A graph that shows the combinations of two goods the economy can possibly produce given the available resources and technology.

Efficient Points (on the PPF)

Production combinations that lie directly on the Production Possibilities Frontier, where all available resources are fully utilized.

Inefficient Points (under the PPF)

Production combinations lying inside or below the Production Possibilities Frontier, representing possible production where some resources are underutilized (such as unemployed labor or idle factories).

Opportunity Cost

What must be given up to obtain an item; moving along a PPF illustrates the societal tradeoff of sacrificing one good to produce more of another.

Slope of the PPF

The 'rise over the run' of the production frontier curve, measuring the opportunity cost of producing one additional unit of a good in terms of the other good sacrificed.

Economic Growth (PPF)

An outward shift of the Production Possibilities Frontier resulting from additional resources or improvements in technology, enabling the economy to produce greater quantities of goods.

Bow-Shaped PPF

A Production Possibilities Frontier that curves outward, illustrating increasing opportunity costs that occur when different workers have different skills or resources have varying suitability for production.

Straight-Line PPF

A Production Possibilities Frontier with a constant slope, indicating that the opportunity cost between goods remains constant as resources shift across industries.