Chapter 2: Model Building and Gains from Trade

Question 1

can be tested and validated, it describes “what is”

Answer 1

positive statement

Question 2

an opinion that cannot be tested or validated, it describes “what ought to be”

Answer 2

normative statement

Question 3

means “other things being equal” or “all else equal” and is used to build economic models, allows economists to examine change in one variable while holding everything else constant

Answer 3

ceteris paribus

Question 4

the variables that can be controlled in a model

Answer 4

endogenous factors

Question 5

the variables that cannot be controlled in a model

Answer 5

exogenous factors

Question 6

states that the opportunity cost of producing a good rises as a society produces more of it

Answer 6

law of increasing opportunity cost

Question 7

the limiting of one’s work to a particular area

Answer 7

specialization

Question 8

refers to the ability of one producer to make more than another producer with the same quantity of resources

Answer 8

absolute advantage

Question 9

period where decisions are made in regards to short-term wants, needs, or limitations

Answer 9

short run

Question 10

period where decisions are made in regards to needs, wants, and limitations in the long-term

Answer 10

long run

Question 11

produced for present consumption

Answer 11

consumer goods

Question 12

help produce other valuable goods and services in the future

Answer 12

capital goods

Question 13

the process of using resources to create or buy new capital

Answer 13

investment

Question 14

a model that illustrates the combinations of outputs that a society can produce if all of its resources are being used efficiently

Answer 14

production possibilities frontier