Chapter 2: Thinking Like an Economist Flashcards
What are the two roles of economists?
Scientists (explain the world) and policy advisors (improve economic outcomes).
What is the scientific method in economics?
Observe, develop a theory, test the theory with data.
Why do economists make assumptions?
To simplify reality and focus on key factors.
Why do economists use models?
To understand economic interactions by simplifying complex real-world situations.
What does the Circular-Flow Diagram illustrate?
The flow of money, goods, and services between households and firms.
What do households do in the economy?
Own and sell factors of production (land, labor, capital) and buy goods/services.
What do firms do in the economy?
Hire factors of production and sell goods/services.
What are the two markets in the Circular-Flow Diagram?
Goods & Services Market (firms sell, households buy).
Factors of Production Market (households sell, firms buy).
What is the PPF?
A graph showing the maximum possible output combinations of two goods given resources.
What does a point on the PPF represent?
Efficient production (full use of resources).
What does a point inside the PPF represent?
Inefficiency (unused resources).
What does a point outside the PPF represent?
Unattainable production level with current resources.
What does the slope of the PPF represent?
Opportunity cost – the trade-off between producing different goods.
What happens to the PPF when the economy grows?
It shifts outward, allowing more production.
What does microeconomics study?
Decisions of households, firms, and individual markets.
What does macroeconomics study?
Economy-wide issues like inflation, unemployment, and economic growth.
What is a positive statement?
A fact-based statement that describes the world as it is. ✅ Testable.
Example: “Higher taxes reduce consumer spending.”
What is a normative statement?
A value-based statement that describes how the world should be. ❌ Not testable.
Example: “The government should increase the minimum wage.”
Why do economists have different views?
Different scientific judgments (interpret data differently).
Different values (political/economic perspectives).
