Chapter 2 Flashcards
How is economics like a science
Economics is like a science because economists use the scientific method. They devise theories, collect data, and then analyze these data in an attempt to verify or refute their theories about how the world works. Economists use theory and observation like other scientists, but they are limited in their ability to run controlled experiments. Instead, they must rely on natural experiments.
Why do economists make assumptions
Economists make assumptions to simplify problems without substantially affecting the answer. Assumptions can make the world easier to understand.
Should an economic model describe reality exactly
An economic model cannot describe reality exactly because it would be too complicated to understand. A model is a simplification that allows the economist to see what is truly important.
Draw and explain a ppf for an economy that produces milk and cookies. What happens to the frontier if disease kills half of the economy’s cow population
Figure 3 shows a production possibilities frontier between milk and cookies (PPF1). If a disease kills half of the economy’s cow population, less milk production is possible, so the PPF shifts inward (PPF2). Note that if the economy produces all cookies, so it doesn’t need any cows, then production is unaffected. But if the economy produces any milk at all, then there will be less production possible after the disease hits.
Use a production possibilities frontier to describe the idea of “efficiency.”
The idea of efficiency is that an outcome is efficient if the economy is getting all it can from the scarce resources it has available. In terms of the production possibilities frontier, an efficient point is a point on the frontier, such as point A in Figure 4. A point inside the frontier, such as point B, is inefficient since more of one good could be produced without reducing the production of another good.
What are the two subfields into which eco nomics is divided? Explain what each subfield studies.
The two subfields in economics are microeconomics and macroeconomics. Microeconomics is the study of how households and firms make decisions and how they interact in specific markets. Macroeconomics is the study of economy-wide phenomena.
What is the difference between a positive and a normative statement? Give an example of each.
Positive statements are descriptive and make a claim about how the world is, while normative statements are prescriptive and make a claim about how the world ought to be. Here is an example. Positive: A rapid growth rate of money is the cause of inflation. Normative: The government should keep the growth rate of money low.
What is the Bank of Canada?
The Bank of Canada sets Canada’s monetary policy. It employs more than 200 economists to analyze financial markets and macroeconomic developments.
Why do economists sometimes offer conflicting advice to policymakers?
Economists sometimes offer conflicting advice to policymakers for two reasons:
(1) economists may disagree about the validity of alternative positive theories about how the world works; and
(2) economists may have different values and, therefore, different normative views about what public policy should try to accomplish.
Draw a circularflow diagram. Identify the parts of the model that correspond to the flow of goods and services and the flow of dollars for each of the following activities.
a. Sam pays a storekeeper $1 for a litre of milk.
b. Sally earns $7 per hour working at a fast
food restaurant.
c. Serena spends $10 to see a movie.
d. Stuart earns $10 000 from his 10 percent
ownership of Acme Industrial
Imagine a society that produces military goods and consumer goods, which we’ll call “guns” and “butter”
a. Draw a PPF for the guns and butter. Explain why it most likely has a bowed-out shape
Figure 6 shows a production possibilities frontier between guns and butter. It is bowed out because when most of the economy’s resources are being used to produce butter, the frontier is steep and when most of the economy’s resources are being used to produce guns, the frontier is very flat. When the economy is producing a lot of guns, workers and machines best suited to making butter are being used to make guns, so each unit of guns given up yields a large increase in the production of butter. Thus, the production possibilities frontier is flat. When the economy is producing a lot of butter, workers and machines best suited to making guns are being used to make butter, so each unit of guns given up yields a small increase in the production of butter. Thus, the production possibilities frontier is steep.
2B. Show a point that is impossible for the economy to achieve. Show a point that is feasible but inefficient
Point A is impossible for the economy to achieve; it is outside the production possibilities frontier. Point B is feasible but inefficient because it’s inside the production possibilities frontier.
2C. Imagine that the society has two political parties, called the Hawks (who want a strong military) and the Doves (who want a smaller military). Show a point on your PPF that the Hawks might choose and a point the Doves might choose.
The Hawks might choose a point like H, with many guns and not much butter. The Doves might choose a point like D, with a lot of butter and few guns.
2D. Imagine that an aggressive neighbouring country reduces the size of its military. As a result, both the Hawks and the Doves reduce their desired production of guns by the same amount. Which party would get the bigger “peace dividend,” measured by the increase in butter production? Explain.
If both Hawks and Doves reduced their desired quantity of guns by the same amount, the Hawks would get a bigger peace dividend because the production possibilities frontier is much flatter at point H than at point D. As a result, the reduction of a given number of guns, starting at point H, leads to a much larger increase in the quantity of butter produced than when starting at point D.
The first principle of economics discussed in Chapter 1 is that people face tradeoffs. Use a PPF to illustrate society’s tradeoff between a clean enviroment and the quantity of industrial output. What do you suppose determine the shape and position of the frontier? Show what happens to the frontier if engineers develop an automobile engine with almost no emissions.
See Figure 7. The shape and position of the frontier depend on how costly it is to maintain a clean environment¾the productivity of the environmental industry. Gains in environmental productivity, such as the development of a no-emission auto engine, lead to shifts of the production-possibilities frontier, like the shift from PPF1
