Chapter 2: Thinking like an Economist Flashcards
What are firms in a circular flow diagram?
Produces goods and services using inputs(labor,land, and capital)
What are hosueholds in a circular flow diagram?
Owns the factors of production and consume all the goods and services that the firms produce
How do firms and households interact in the circular flow diagram in Markets for Goods and Services?
Households are BUYERS (buys the output)
Firms are SELLERS
How do firms and households interact in the circular flow diagram in Markets for the Factors of Production?
Households are SELLERS (provides input)
Firms are BUYERS
What does the inner loop represent in the circular flow diagram?
The flow of inputs and outputs
What does the outer loop represent in the circular flow diagram?
The corresponding flow of dollars/income/profit/etc.
Explain the relationship of Households and the Factors of Production
Households SELL the use of their land, labor, and capital to firms in the markets.
In return they BUY goods and services from Factors of Production
Explain the relationship of Firms and the Markets for Goods and Services
Firms BUY land, labor, and capital to produce goods and services
In return, these goods and services are SOLD to households in the Market for Goods and Services
What is a Production Possibilities Frontier?
A graph that shows the combinations of output that the economy can possibly produce with the avaibale factors of production and production technology
What is considered inefficient on the Production Possibilities Frontier?
Anything OUTSIDE the production frontier shows this inefficient outcome.
This is because resources are scarce, not every outcome is feasible.
What is considered efficient on the Production Possibilities Frontier?
Points ON the line represents efficient levels of production (on the line, NOT inside)
This is because its producing the maximum possible from the resources available
Why is it not efficient for a point to be on the INSIDE of a Production Possibilities Frontier?
The economy would be producing less than it could from the resources available.
What else does the Production Possibilities Frontier show?
The opportunity cost of one good as measure in terms of the other
Why is the Production Possibilities Frontier bowed outward?
The opportunity cost of producing more of a good INCREASES as it nears the maximum production of that good.
What is Microeconomics?
The Study of how households and firms make decisions and how they interact in markets.
EX: might study the effects of rent control on housing in NY
What is Macroeconomics?
The study of economy-wide phenonmena including inflation, unemployment, and economic growth
EX: study the effects of borrowing by the federal government
What are Positive Statements?
Claims that attempt to DESCRIBE the world AS IT IS.
EX: Minimum-wage laws cause employment
What is a key difference between Positive and Normative statements?
The difference is how we judge the validity
What are Normative Statements?
Claims that attempt to PRESCRIBE how the world SHOULD BE.
EX: The government should riase the minimum wage
What are the two reasons economists disagree?
Differences in Scientific Judgement and Differences in Values
