Principles of Microeconomics - Chapter 2: Thinking Like an Economist

Flashcards covering key concepts from Chapter 2: Thinking Like an Economist, including economic models, the circular flow diagram, the production possibilities frontier, and the roles of economists as scientists and policy advisers.

Circular-flow diagram

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

Production Possibilities Frontier (PPF)

A graph that shows the various combinations of outputs that the economy can possibly produce with the available factors of production and production technology.

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.

Positive statements

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

Normative statements

Prescriptive claims about how the world ought to be, requiring evaluation of both values and facts.

Scientific Method (in Economics)

The development and testing of theories about how the world works, often using natural experiments from history due to the impracticality of conducting experiments.

Assumptions (in Economics)

Simplifications made to understand the complex world and build economic models, chosen based on the question and time horizon.

Economic Models

Diagrams and equations built with assumptions to simplify reality, used by economists, and subject to revision.

Firms (in Circular Flow)

Entities that produce goods and services using factors of production (inputs).

Households (in Circular Flow)

Entities that own factors of production and consume goods and services.

Markets for goods and services

Where households are buyers and firms are sellers.

Markets for factors of production

Where households are sellers and firms are buyers.

Factors of production

Inputs used by firms to produce goods and services, owned by households.

Efficient Outcomes (on PPF)

Points on the Production Possibilities Frontier where the economy is getting all it can from its scarce resources, implying a trade-off to produce more of one good.

Opportunity Cost (on PPF)

The value of the next best alternative given up when making a choice, represented by the slope of the Production Possibilities Frontier.

Inefficient Outcomes (on PPF)

Points inside the Production Possibilities Frontier where the economy is producing less than it could from its available resources.

Technological advance

An improvement in technology that causes an outward shift of the Production Possibilities Frontier, allowing for greater production of goods.

Economic growth

An outward shift of the Production Possibilities Frontier, indicating the ability to produce more of both goods.

Economist as Scientist

Role of an economist to explain the causes of economic events by devising theories, collecting, and analyzing data.

Economist as Policy Adviser

Role of an economist to recommend policies aimed at improving economic outcomes.

Council of Economic Advisers

A group that advises the U.S. president and writes the annual Economic Report of the President.

Negatively related variables

Two variables that move in opposite directions, often represented by a downward-sloping curve.

Positively related variables

Two variables that move in the same direction, often represented by an upward-sloping curve.

Slope (of a line)

The ratio of the vertical distance covered (change in y) to the horizontal distance covered (change in x) as one moves along the line.

Omitted variables

Variables not included in a graph or analysis that can lead to a deceptive or misleading conclusion about cause and effect.

Reverse causality

A situation where an assumed cause-and-effect relationship is actually the opposite of what is believed, with effect B causing event A, rather than A causing B.