BE

Chapter 2 flashcards

  • What goes up must come down

    • Lemonade and temperature

      • Positive relation

    • Hot chocolate and temperature

      • Negative correlation

  • Scientific method in economics

    • Observe phenomenon

    • Develop a hypothesis

    • Construct a model to test the hypothesis

    • Look for opportunities to test how well the model works

    • Revise or refute the theory based on evidence

  • Positive and Normative analysis

    • Positive statement: can be tested and validated

      • Describes "what is"

      • Example: income in the US has been increasing

    • Normative statement: an opinion that cannot be tested or validated

      • Describes "what ought to be"

      • Example: the US should send foreign aid to other countries.

  • Economic models: simplified versions of reality used to understand the complex real-world economy.

    • Simplify reality by making assumptions.

    • Good models are simple, flexible, and accurate in making predictions.

  • Ceteris Paribus: means "other things being equal" in Latin

    • Central assumption in model building.

    • Allows economists to study the effect of one variable by holding everything else constant.

  • Circular-Flow diagram

    • Visual model of the economy

    • Shows how dollars flow through markets among households and firms

    • 2 decision makers: FIRMS AND HOUSEHOLDS

    • Interacting in 2 markets

      • Market for goods and services

        • Sellers = firms

        • Buyers = households

      • Market for factors of production (inputs)

        • Sellers = households

        • Buyers = firms

    • Barter: individuals trading a good or service in exchange for something they want.

    • Double coincidence of wants: occurs when each party in an exchange transaction has what the other person desires.

      • Eliminated by the use of money.

    • PPF (Production possibilities frontier)

      • A graph: combinations of outputs that the economy can possibly produce

      • Given the available factors of production and technology

      • Downward slopping

        • Must give up one good to increase the production of another

      • The slope of the PPF is equal to the negative value of the opportunity cost of producing good "Y" in terms of good "X"

      • Examples:

        • 2 goods: computers and wheat

        • One resource: labor (measured in hours)

        • The economy has 50,000 labor hours per month available for production

     

    Moving along a PPF

    • Shifting resources from the production of one good to the other

  • Society faces a tradeoff

    • Getting more of one good requires sacrificing some of the other

  • Slope of PPF

    • Opportunity cost of one good in terms of the other

  • Economic Growth and PPF

    • With additional resources or improvement in technology, the economy can produce more computers and more wheat

      • Or any combination in between.

    • Growth shifts the PPF outward

  • Law of increasing opportunity cost: the opportunity cost of producing a good rises as society produces more of it.

    • Not all resources are perfectly adaptable for producing both goods.

    • The opportunity cost of producing a good will rise as we produce more of it

  • Effect on PPF

    • The slope will get steeper as we move left to right.