CHAPTER 2: Thinking Like an Economist

Question 1

Economists try to address their subject with scientist’s objectivity.

Answer 1

The Economist as Scientist

Question 2

a visual model of the economy that shows how dollars flow
through markets among households and firms

Answer 2

circular-flow diagram

Question 3

the economy is simplified to include only two types of decision makers

Answer 3

firms and household

Question 4

produce goods and services using inputs, such as labor, land, and capital (buildings and machines).

Answer 4

firms

Question 5

Firms produce goods and services using inputs, such as labor, land, and capital (buildings and machines). These inputs are called the______

Answer 5

factors of production.

Question 6

own the factors of production and consume all the goods and services that the firms produce

Answer 6

households

Question 7

households and firms interact in two types of markets

Answer 7

1. markets for good and services
2. markets for the factors of production

Question 8

In the markets for goods
and services, households are _____, and firms are _____. In particular, households buy the output of goods and services that firms produce.

Answer 8

1. buyers
2. sellers

Question 9

In the markets for the factors of production, households are ______, and firms are _____. In these markets, households provide the inputs that firms use to produce goods and services.

Answer 9

1. sellers
2. buyers

Question 10

a graph that shows the combinations of output that the economy can possibly produce given the available factors of production and the available production technology

Answer 10

production possibilities frontier

Question 11

An outcome is said to be _____ if the economy is getting all it can from
the scarce resources it has available.

Answer 11

efficient

Question 12

The cost of something is what you give up to get it.

Answer 12

opportunity cost

Question 13

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

Answer 13

microeconomics

Question 14

the study of economy-wide phenomena including inflations, unemployment, and economic growth

Answer 14

macroeconomics

Question 15

claims that attempt to describe the world as it is

Answer 15

positive statements

Question 16

claims that attempt to describe how the world should be

Answer 16

normative statements

Question 17

Why do economists so often appear to give conflicting advice to policymakers?
There are two basic reasons:

Answer 17

• Economists may disagree about the validity of alternative positive theories about how the world works.
• Economists may have different values and therefore different normative views about what government policy should aim to accomplish.

Question 18

traces out the effect of a good’s price on the quantity of the good consumers want to buy.

Answer 18

demand curve

Question 19

when the price increases and the quantity of demanded also increases

Answer 19

law of demand

Question 20

when income decreases, the demand curve shifts to the ____

Answer 20

left

Question 21

when income increases, the demand curve shifts to the ____

Answer 21

right

Question 22

a line is the ratio of the vertical distance covered to the horizontal distance covered as we move along the line.

this definition is usually written out in mathematical symbols as follows:

Answer 22

slope

slope =delta y/delta x