chapter 2 economic models, trade-offs and trade

model

simplified representation of a real situation that is used to better understand real life situations

other things equal assumption

all other relevant factors remain unchanged = important for building economic model

production possibility frontier

illustrates the trade-offs facing an economy that produces only 2 goods, shows maximum quantity for any given quantity produced of the other

on the line is attainable and efficient

right of line = unattainable

left of line = attainable + inefficient

factors of production 

resources used to produce goods and service, term refers to resources that is not used up in production 

ie. workers = factors of production

technology

technical means for producing g/s

comparative advantage

producing a g/s if its opportunity cost of producing the g/s is lower than other countries’ cost

absolute advantage

if country can produce more output per worker than other countries

barter

when people directly exchange g/s that they have for g/s they want (without using money)

circular flow diagram

represents transactions that take place in an economy by 2 diff kinds of flow around a circle

market for g/s

households buy g/s they want from firms

factor markets

firms buy the resources they need to produce g/s

income distribution 

way in which total income is divided among the owners of various factors of production 

positive economics

analysis that describes the way the economy actually works

normative economics

analysis saying how world should work

forecast

simple predictions of future