Chapter 2: thinking like an econmists

Question 1

Experiments in the science of economics are conducted by

Answer 1

1. observing the economic world around us
2. coming up with theories for explaining the observations
3. collecting data to conduct statistical analysis for testing the theories offered
4. accepting or rejecting the theory only after rigorous statistical analysis

Question 2

why does history have an important role in the science of economics?

Answer 2

because it provides data and also suggest patterns for observations to be formed

Question 3

what is the scientific method

Answer 3

dispassionate development and testing of theories about how the world works

Question 4

what is the role of assumptions

Answer 4

assumptions can simplify the complex world and make it easier to understand (allows us to focus our attention)

Question 5

what do economic models omit

Answer 5

irrelevant details. it is simplified. they are built using assumptions. we do this in order to improve our understanding

Question 6

what is the circular flow diagram

Answer 6

how the economy is organized and how participants in the economy interact with each other

Question 7

with regards to the circular diagram, this model for simplicity, has only two participants or decision makers, who are they

Answer 7

1. households

2. firms

Question 8

with regards to the circular flow diagram, what are the two other possible economic participants

Answer 8

1. governments

2. foreign sector

Question 9

with regards to circular flow diagram, two players - households and firms - are assumed to interact in just two markets, what are they

Answer 9

1. market for goods and services (output market)

2. market for factors of production (input or resource market)

Question 10

in the circular flow diagram, the inner loop depicts what

Answer 10

the flow of inputs and outputs

Question 11

in the circular flow diagram, the outer loop depicts what

Answer 11

the monetary exchange associated with the flow of inputs and output

Question 12

why do the two loops flow in the opposite direction?

Answer 12

explain each

Question 13

what is the production possibilities frontier

Answer 13

it is a graph that shows the combinations of output of two products that the economy can possibly produce, given available inputs and production technology

Question 14

what does the PPF model assume

Answer 14

1. the economy only produces 2 goods(or two types of categories)
2. at any point in time, the economy has a fixed stock for factors of production or inputs such as labour, land and machinery
3. at any point of time, the economy has fixed state of technology available for production

Question 15

the production possibility frontier shows us what

Answer 15

the maximum combinations of two goods that can be produced, assuming fixed resources and fixed technology

Question 16

the sacrifice of making one good versus another is called

Answer 16

opportunity cost

Question 17

if a point is inside the PPF, what does this mean

Answer 17

this is an inefficient production alternative. the society is able to produce more
- this indicates underemployment or unemployed resources

Question 18

suppose a major advance in technology occurs that allows this economy to produce everything more efficiently. this advance is equivalent to

Answer 18

a growth in productive capacity.

the PPF moves right

Question 19

do demand conditions impact PPF

Answer 19

no, only supply factors do

Question 20

what does the law of increasing opportunity cost state

Answer 20

the opportunity cost of producing more of one product increases as more is produced

Question 21

Suppose the country has a high unemployment rate. the opportunity cost of using unemployed resources for production is

Answer 21

zero

if a resource is unemployed, nothing is given up when it becomes employed

Question 22

where on the PPF curve should an economy be

Answer 22

the decision cannot be made by an economist - it is made by society in general

Question 23

what is the definition of microeconomics

Answer 23

study of how households and firms make decisions and how they interact in markets

Question 24

what is the definition of macroeconomics

Answer 24

the study of economy-wide phenomena,

including;
inflation
unemployment
economic growth