Chapter 2 Flashcards
What are the steps in the “scientific method of economics”?
Researchers observe a phenomenon that interests them
Researchers then develop a hypothesis based on the observations
They then construct a model to test the hypothesis
They then design experiments to test how well the models work. After collecting data, they verify, revise or refute the hypothesis
Distinguish between a “normative” and “positivist” statement
A positivist statement can be tested and validated; it describes “what is”.
A normative statement is an opinion that cannot be tested or validated; it describes “what ought to be”.
What is the meaning of “Ceteris Paribus”?
Means “other things being equal” or “all else equal” and is used to build economic models.
It allows economists to examine a change in one variable while holding everything else constant.
DIstinguish between “endogenous” and “exogenous” factors in economic models.
Endogenous factors are v_ariables that can be controlled_ for in a model
Exogenous factors are v_ariables that cannot be controlled_ for in a model
What are the 3 factors that need to be considered when constructing an economic model?
What we include in the model
The assumptions we make when choosing what to include in the model (the dangers of faulty assumptions eg. GFC)
The outside conditions that can affect the model’s performance
What is a “production possibilities frontier”?
A production possibilities frontier (PPF) is a model that illustrates the combinations of outputs that a society can produce if all of its resources are being used efficiently
What are the assumptions made in PPFs?
- Technology available for production and the quantity of resources remain fixed
How are opportunity costs present in PPFs?
Whenever society is producing on the PPF, the only way to get more of one good is to accept less of another.
Why does the production rate in a PPF not expand at a constant rate?
To get more of one good, society will have to use workers who are increasingly less skilled at making them.
- Law of Increasing Opportunity
What is the “law of increasing opportunity cost”?
The law of increasing opportunity cost states that the opportunity cost of producing a good rises as society makes more of it.
What is the connection between “economic growth” and PPF?
Economic growth is the process that enables society to produce more output in the future.
If good A’s technology is improved, how would this impact the PPF?
If good A’s technology is improved, this would allow the firm to make more of the good A with less resources, allowing for redeployment of labour forces. This would also increase the capability to produce Good B at the same time.
How would more workers impact the PPF?
With more workers, both sides of the PPF is increased as the capacity to produce more goods is increased.
What is “specialisation” and what does it lead to?
Specialisation is the limiting of one’s work to a particular area.
- Leads to a greater output
What is an “absolute advantage”?
An absolute advantage refers to the ability of one producer to make more than another producer with the same quantity of resources.
