Chapter 2 Test Flashcards
What advantage does a line graph offer over a tabular model?
Line graph provides significantly more data than a tabular model
For an economist, what is the primary value of a production possibilities curve?
It enables the economist to see the maximum feasible amounts that a business can produce with its limited resources
What does the circular flow model attempt to explain?
How a complete national system functions
What are the four factors of production?
Land, Labor, Capital, Entrepreneurship
What four payments do business firms make in exchange for the factors of production?
Rent, Wages, Interest, Profit
What are the four major entities in the circular flow model, and what is the primary role of each in the circular flow?
Households- principle purchasers of goods and services
Business firms- create goods and services
Government- purchases goods and services and provides transfer payments
Financial Market- circulates money from households to business firms
What is a model? Give an example of an economic model.
A simplified representation of a more complex concept or item. PPC, Circular Flow Model
On a production possibilities curve, what do points on, inside, and outside the curve represent?
On- productive efficiency and the use of resources
Inside- inefficient production
Outside- a combination of products that would be impossible to produce, unless conditions would be able to change
Draw the basic circular flow (in which the only participants are households and business firms), labeling each of the arrows or flows
Pg32
What is the difference between financial capital and real capital?
Financial capital is money that is lent to business firms from households. Real capital is the tools business firms use to produce goods and services
What is the most important factor of production? Why?
Entrepreneurship, because it directly organizes and plans the production process by coordinating the necessary land, labor, and capital
What economic functions does the government perform as illustrated by the circular flow model?
Purchases goods and services from businesses and gives transfer payments to households, while it collects personal taxes from households, and business taxes from firms
Why is the financial market necessary for the effective functioning of a developed society?
A financial market takes savings from households and channels them to businesses so that financial capital can help business firm operate
Explain what an economist means when he refers to the government as crowding out.
Occurs when the government borrows money from financial institutions thus making financial capital unavailable for businesses
With what economic principle do we most often associate Ludwig von Mises?
Free market
