Chapter 2 : Thinking Like an Economist Flashcards
2 roles an economist can play:
as SCIENTIST when try to explain the economic world, and as POLICYMAKER when try to improve it.
scientific method: Observation, Theory, and More Observation
OBSERVE an event => DEVELOP a theory => collect data to TEST the theory
Economic Models are used to ____
- show RELATIONSHIPS between variables
- explain the economy’s BEHAVIOR
- DEVISE POLICIES to improve economic performance
Circular-Flow Diagram (CFD)
shows the flow of goods and services, factors of production and monetary payments between households and firms
Households sell (a)\_\_\_\_ to firms in the market for factors of production and receive (b)\_\_\_\_ Households use these dollars to buy G and S from firms in (c)\_\_\_\_. The firms use (d)\_\_\_\_ to pay for the factors of production
(a) factors of production (land, labor, and capital)
(b) wages, rent, and profit
(c) the market for goods and services
(d) this revenue
Production Possibilities Frontier (PPF)
a graph that shows the COMBINATION OF OUTPUT the economy can possibly produce given available factors of production and available production technology
(a) Why is economy operating on PPF efficient ?
(b) What about points inside or outside the curve ?
(a) Because it is producing a maximum possible mix of output from available resources
(b) Inside - inefficient; Outside - unattainable
PPF shows (a)____ and (b)____ (to produce more of one good, it must produce less of the other)
(a) trade-offs society faces
(b) opportunity cost of the additional production
Why is PPF bowed outward ?
Because the opportunity cost of producing more of a good increases when we near maximum production of
that good
(because we use resources better suited toward production of the other good in order to continue to expand production of the first good)
The values of Endogenous variables are determined
(a)____. The values of Exogenous variables are determined (b)____
(a) IN the model (EX: Qd, Qs, price)
b) OUTSIDE the model (EX: Y, Ps
Positive statements (a)\_\_\_\_ the world "as it is", while Normative statements (b)\_\_\_\_ how the world "ought to be". Positive statements can be confirmed or refuted with (c)\_\_\_\_ while Normative statements involve (d)\_\_\_\_
(a) describe
(b) prescribe
(c) evidence
(d) values (ethics, religion, political philosophy) as well as facts.
economic growth
technological advance in production shifts PPF outward.
Why are macro and micro related ?
Because changes in overall economy arise from decisions of millions of individuals
“Money growth causes inflation” is a (a)____.
“The government ought to reduce inflation” is a (b)____
(a) positive statement (of a scientist)
b) normative statement (of a policy adviser
Why Economists Disagree ?
- Economists may have different scientific judgments (different positive theories)
- Economists may have different values (different normative views)
