Chapter 2 Flashcards
Positive Statement
Can be tested and validated; describes ‘what is.’
Normative Statement
An opinion that cannot be tested or validated; it describes ‘what ought to be.’
Why do we use positive analysis?
To remain as objective as possible - this is key for economics. Normative analysis is the realm of policy-makers.
What do economic models do?
Provide frameworks which enable us to predict the effect that changes in prices, production and government policies have on behavior.
What is Ceteris Paribus?
The concept under which economists examine a change in one variable while holding everything else constant - helps determine which variable change caused the effect.
What are endogenous factors?
Factors that we know about and can be controlled in a model
What are exogenous factors?
Factors beyond our control in the model.
What is the production possibilities function?
A model that illustrates the combinations of outputs that a society can produce if all of its resources are being used efficiently.
Opportunity Cost
The highest-valued alternative given up to pursue another course of action
What is the Law of Increasing Relative Cost?
The opportunity cost of producing a good rises as society produces more of it.
How does economic growth affect the production possibilities function curve?
Shifts to the right - e.g. if a society develops a new technology to make production more efficient.
What is an absolute advantage?
The ability of one producer to make something using the fewest number of resources.
What is a comparative advantage?
The ability of one producer to make more than another producer with the same quantity of resources.
