Ch. 2 Section Reviews Flashcards

1
Q

What are the two purposes for economic models?

A

Instruction and prediction of future events.

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2
Q

What advantage does a line graph offer over a tabular model?

A

The line graph provides significantly more data than the tabular model.

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3
Q

For an economist, what is the primary value of a production pos­sibilities curve?

A

A PPC enables the economist to see the maximum feasible amounts that a business can produce with its limited resources.

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4
Q

What does the circular flow model attempt to explain?

A

The circular flow model is a visual explanation of how a complete national economic system functions

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5
Q

What are the four factors of production?

A

Land, labor, entrepreneurship, capital

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6
Q

What four payments do business firms make in exchange for the factors of production?

A

Rent, wages, profit, interest

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7
Q

What are the four major entities in the circular flow model, and what is the primary role of each in the circular flow?

A

Households - principle purchasers of goods and services
Business firms - create goods and services
Government - purchase goods and services and provide transfer payments
Financial market - circulate money form households to business firms

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8
Q

What is the difference between financial capital and real capital?

A

Financial capital is money that is lent to business firms from households.
Real capital is the tools business firms use to produce goods and services.

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9
Q

What is the most important factor of production? Why?

A

Entrepreneurship. It directs, organizes, and plans the production process by coordinating the necessary land, labor, and capital.

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10
Q

Why is the financial market necessary for the effective function­ing of a developed society?

A

A financial market takes the savings of households and channels them to businesses so that the financial capital can help business firms operate effectively.

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11
Q

Explain what an economist means when he refers to the govern­ment as crowding out.

A

Crowding out occurs when the government borrows money from financial institutions thus making financial capital unavailable for businesses.

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12
Q

With what economic principle do we most often associate Ludwig von Mises?

A

Free Market

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