Chapter 2 Flashcards
How is economics similar to the natural sciences?
Economists use the scientific method, which involves observation, theory development, and testing theories with data, similar to physicists and biologists.
What is the scientific method in economics?
It is the dispassionate development and testing of theories about how the economy work
What is a challenge economists face compared to natural scientists?
Economists cannot conduct controlled experiments, as manipulating economic factors like a country’s monetary policy is impractical.
How do economists test theories without conducting controlled experiments?
Economists use historical data and natural experiments, like observing the effects of external events such as wars or changes in policy.
Why do economists make assumptions?
Assumptions simplify complex economic realities to make models more understandable and useful for analysis.
Give an example of a simplified assumption used by economists.
Economists might assume there are only two countries and two goods when analyzing international trade, despite the real world having many countries and goods.
What determines the choice of assumptions in economic models?
Economists choose assumptions based on the specific questions they are trying to answer, similar to how physicists adjust assumptions when studying different phenomena.
What is an economic model?
A simplified representation of some aspect of the economy used to analyze economic behavior and predict outcomes.
How are economic models like biological models used in education?
Just as plastic models in biology simplify the human body for teaching, economic models omit details to focus on essential economic principles.
Name two simple economic models introduced in this chapter.
The Circular-Flow Diagram and the Production Possibilities Frontier (PPF).
What does the Circular-Flow Diagram illustrate?
It shows the flow of goods and services and the flow of money between households and firms in an economy.
What roles do households and firms play in the Circular-Flow Diagram?
Households buy goods and services from firms and provide labor, land, and capital in factor markets. Firms sell goods and services and hire inputs from households.
What are the two types of markets in the Circular-Flow Diagram?
Markets for Goods and Services and Markets for Factors of Production.
What does the Production Possibilities Frontier (PPF) represent?
The PPF shows the maximum combinations of goods and services that can be produced with available resources and technology.
What does a point on the PPF indicate?
An efficient allocation of resources where producing more of one good requires sacrificing some of another.
