micro ch2

Vocabulary flashcards covering core concepts of economic models, PPF, comparative advantage, circular-flow diagrams, and positive versus normative economics.

Model

A simplified representation of reality used to understand real situations.

Other things equal assumption

An assumption that all other relevant factors are held constant so that the effect of one change can be isolated at a time.

Production Possibility Frontier (PPF)

A model that shows the maximum feasible output combinations of two goods that can be produced given fixed resources and technology.

Efficient in production

A state where an economy cannot produce more of one good without producing less of another good, indicating that production is on the PPF.

Efficient in allocation

A state where an economy produces the mix of goods that people actually want and distributes them to the right people.

Opportunity Cost

The true cost of a good, representing what must be given up to get it rather than just its monetary price.

Increasing opportunity cost

A scenario where producing additional units of a good requires giving up increasingly larger amounts of another good because resources less suited to its production must be used, making the PPF bowed outward.

Factors of production

Resources used to produce goods and services that are not used up in production, consisting of land, labor, physical capital, and human capital.

Physical capital

Manufactured resources such as machines and buildings used in the production of goods and services.

Human capital

The skills and education possessed by workforce members that enhance productive capacity.

Technology

The technical means for producing goods and services.

Comparative advantage

The ability of a country, person, or firm to produce a good at a lower opportunity cost than other producers.

Absolute advantage

The ability to produce more output per resource than other producers.

Barter

The direct trading of goods or services for other goods or services without using money.

Circular-flow diagram

A model representing economic transactions through physical flows of goods, services, and factors in one direction and money flows in the opposite direction between households and firms.

Markets for goods and services

Markets where households purchase goods and services from firms, resulting in a flow of goods to households and money to firms.

Factor markets

Markets where firms buy factors of production from households, establishing money flows to households that determine income distribution.

Income distribution

How total income generated in an economy is allocated among owners of different factors of production.

Positive economics

The branch of economic analysis that describes how the world works using facts, models, and forecasts with definite right or wrong answers.

Normative economics

The branch of economic analysis that prescribes how the world should work based on value judgments without a single right answer.

Forecast

A quantitative or qualitative prediction about future economic conditions based on a model.