Chapter 2 Flashcards
The art in scientific thinking is deciding which assumptions to make
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Economists use models to learn about the world their models mostly consist of diagrams and equation
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A circular flow diagram can be used as a model of the economy. The model is simplified to include only two types of decision makers firms and households
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firms produce goods and services using input such as labor, land, and Capitol (buildings in machines). These inputs are called the factors of production
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Households own the factors of production and consume all the goods and services that the firm produce
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Households and firms interact in two types of markets.
In the market for goods and services households are buyers and firms are sellers
Households buy the output of goods and services that firms produce
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In the markets for the factors of production
households are the sellers and firms are the buyers.
In these markets households provide the input that firms used to produce goods and services
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the circular flow diagram offers a simple way of organizing the economic transactions that occur between households and firms in the economy
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The two loops of the circular flow diagram are distinct but related. The innerloop represents the flows of input and output. The Outerloop of the diagram represents the corresponding flow of dollars
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The production possibilities frontier is a graph that shows the various combination of output that the economy can possibly produce given the available factors of production in the available production technology that firms used to turn these factors into output
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The field of economics is traditionally divided into two broad subfields microeconomics and macroeconomics
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Microeconomics is the study of how households and firms make decisions and how they interact in specific market
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Macroeconomics is the study of economy wide phenomena
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In general statements about the world came in two types. One type, such as Polly, is positive. Positive statements are descriptive. They make a claim about how the world is.
A second type of statement, such as Norm’s, is normative. Normative statements are prescriptive. They make a claim about how the world ought to be
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Assumptions can simplify the complex world and make it easier to understand
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