Chapter 2 Flashcards
What is circular-flow diagram?
A visual model of the economy that shows how dollars flow through markets among households and firms.
What is production possibilities frontier?
A graph that shows the combinations of output that the economy can possibly produce given the available factors of production and the available production technology.
The economy can produce at any point on or inside the production possibilities frontier, but it cannot produce at points outside the frontier.
A SHIFT IN THE PRODUCTION
POSSIBILITIES FRONTIER.
A technological advance in the computer industry raises the number of computers that a worker can produce per week, the economy can make more computers for any given number of cars. As a result, the production possibilities frontier shifts outward, as in Figure 2-3.
What are Microeconomics and Macroeconomics?
The field of economics is traditionally divided into two broad subfields.
1/ Microeconomics: is the study of how households and firms make decisions and how they interact in specific markets.
2/ Macroeconomics: the study of economy-wide phenomena, including inflation, unemployment, and economic growth.
In what sense is economics like a science?
Economics is like a science because economists devise theories, collect data, and analyze the data in an attempt to verify or refute their theories. In other words, economics is based on the scientific method.
1/ Draw a production possibilities frontier for a society that produces food and clothing, including an efficient point, an inefficient point, and an infeasible point.
2/ Show the effects of a drought.
1/ Figure 1:
- Point A: an efficient point (on the frontier),
- Point B: an inefficient point (inside the frontier),
- Point C: an infeasible point (outside the frontier).
1/ Draw a production possibilities frontier for a society that produces food and clothing, including an efficient point, an inefficient point, and an infeasible point.
2/ Show the effects of a drought.
2/ The effects of a drought are shown in Figure 2. The drought reduces the amount of food that can be produced, shifting the production possibilities frontier inward.
What are positive statements and normative statements?
- Positive statements: claims that attempt to describe the
world as it is.
Eg: Higher taxes discourage work effort.
- Normative statements: claims that attempt to prescribe how the world should be.
Eg: The government should reduce tax rates.
Name three parts of government that regularly rely
on advice from economists?
1/ The Treasury Department in designing tax policy.
2/ The Department of Labor in analyzing data on the employment situation.
3/ The Justice Department in enforcing the nation’s antitrust laws.
Why might economic advisers to the president disagree
about a question of policy?
Economic advisers to the president might disagree about a question of policy because of differing scientific judgments or differences in values.
Why do 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?
__Cannot describe reality exactly since__too complicated to understand.
- Should be a simplification that allows the economist to see what is truly important.
Draw and explain a production possibilities frontier for
an economy that produces milk and cookies. What
happens to this 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”.
“Efficiency” is that if the economy can use all of recources available.
In terms of the production possibilities frontier, an efficient
pointis a pointon the frontier, such as point A in Figure 4.
What is the Council of Economic Advisers?
__is a group of economists who consult with the president of the United States about economic matters.
[The Council consists of three members and a staff of several dozen economists. It writes the annual Economic Report of the President].
Draw a circular-flow 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 quart of milk.
b. Sally earns $4.50 per hour working at a fast food
restaurant.
c. Serena spends $7 to see a movie.
d. Stuart earns $10,000 from his 10 percent ownership of Acme Industrial.
