Chapter 2 - Thinking Like an Economist

Question 1

The Role of Assumption

Answer 1

The key is to choose assumptions that enhance understanding without sacrificing the essence of the problem.

Question 2

Circular Flow Diagram

Answer 2

Consists of two loops: the goods and service market (money and revenue) and the factors of production market (labour, inputs and outputs)

Question 3

Goods and Service Market

Answer 3

Firms produce goods and services that households/consumers buy

Question 4

Factors of Production Market

Answer 4

Households provide the inputs (labour) for firms to create their goods and services

Question 5

Production Possibilities Frontier (PPF)

Answer 5

A graph representing the production of two goods or services, showcasing the tradeoff between producing more of one than the other.
- points on the PPF rather than inside are most efficient (points inside could be due to things like unemployment)
- points outside of the PPF are impossible (the resources just don’t exist)

Question 6

Opportunity Cost (PPF)

Answer 6

Shows the opportunity cost of one good or service in relation to another. The slope of the PPF determines the rate at which one good can be exchanged for another.
Steeper slope = higher opportunity cost, and vice versa.
The opportunity cost of goods and services differ at varying points on the PPF due to different factors (diminishing margin, allocation of labour)

Question 7

Bowed Out PPF

Answer 7

More bowed out - higher opportunity cost, you have to give up more of a product to get the opposing one (ex. if you want more computers you have to give up a lot of smartphones)
Less bowed out - lower opportunity cost, you give up less of one product to get more of another one (you don’t have to give up as many smartphones for more computers)

Question 8

Trade-off Change

Answer 8

With a change in production due to varying factors (ex. technological advancement) an economy can make more of one product now and this shifts that side of the PPF outwards but doesn’t affect the production of the opposing product.

Question 9

Positive Analysis

Answer 9

stating what is happening or what has happened using facts and evidence (think “is”)

Question 10

Normative Analysis

Answer 10

stating what should happen or what is desirable using personal opinions and values (think “ought/should”)

Question 11

Movements Along the Demand Curve

Answer 11

Caused by a change in price resulting in a change in the quantity demanded

Question 12

Shifts In the Demand Curve

Answer 12

Shifts are caused by anything other than a price change (ex. consumer income, price of other products, etc)
When a relevant variable that is not named on either axis changes, the curve shifts.

Question 13

Slope

Answer 13

• The slope of the line is the ratio of the change in the y-coordinate to the change in the x-coordinate.
• Slope = change in y / change in x
• in a demand curve slope does not mean opportunity cost, it represents the price elasticity of demand. It indicates how much the quantity demanded changes in response to a change in price.

Question 14

Reverse Causality

Answer 14

a situation where the expected cause an effect situation is actually reversed.
Ex. ice cream sales and drowning rate increase concurrently, however a third factor, hot weather, is actually responsible for both, or people buying minivans while expecting a baby doesn’t mean that minivans grow the population.