Krugman Textbook Chapter 2 Flashcards
Model
A simplified representation of a real situation that is used to better understand real life situations.
Other Things Equal Assumption
The assumption that all relevant factors except the one under study remain unchanged in a model.
Production Possibility Frontier
A model that shows the trade-offs facing an economy that only produces two goods. It shows the maximum quantity of one good that can be produced for any given quantity produced by the other.
Factors of Production
The resources used to produce goods and services, such as labour and capital.
Technology
The technical means for producing goods and services.
Comparative Advantage
When an individual or country produce less goods or services than another, but costs them less than it would for the other competitors.
Absolute Advantage
When an individual or country can produce more goods or services than its competitors and do it better.
Barter
Exchanging goods and services for other goods and services without using money.
Circular Flow Diagram
A diagram that represents transactions in an economy by two kinds of flows in a circle. Goods and services flow one way, while money to pay for these flows the other way.
Household
A person or group of people who share their income.
Firm
An organization that produces goods and services for sale.
Markets for Goods and Services
Markets where firms purchase the resources they need to produce their goods and services.
Income Distribution
The way total income is divided between the owners of the various factors of production.
Positive Economics
The branch of economic analysis that explains how the economy really works.
Normative Economics
The branch of economic analysis that makes prescriptions about how the economy should work.
