Chapter 2

Question 1

Economics is science

Answer 1

Economists devise theories, collect datga and analyze. They can’t experiment on theories as they can’t influence the government policies. Instead they use examples in history or the data they already have

Question 2

Markets for goods and services

Answer 2

Firms sell their prodcuts or services to the households. Firms get revenue from spendings of households

Question 3

Assumptions and models

Answer 3

Economists use assumptions to test for short term and long term effects. They use models to illustrate the effects of one thing on the other and these models are built with assumptions

Question 4

Markets for factors of production

Answer 4

Households lend/sell labor, land and capital to get income as wages/rent/profit. Firms use these factors of production to produce goods and services

Question 5

Prodcution Possibilities Frontier (PPF)

Answer 5

It shows the limit of economy. Any point on the line is efficient (uses all the resources available), any point below the line is inefficient (some recources are not used) and any point above the line is possible but not achievable with current resources and technology

Question 6

Microeconomics

Answer 6

The study of how households and firms
make decisions and how they interact in markets

Question 7

Macroeconomics

Answer 7

The study of economywide phenomena,
including inflation, unemployment, and
economic growth

Question 8

Positive statements

Answer 8

Claims that attempt to describe the world as it is

Question 9

Normative statements

Answer 9

Claims that attempt to describe how the world should be

Question 10

Why economists disagree

Answer 10

They might have different beliefs or political philosophies. 2 economists studying the same case may not give similar advice/solution.