Topic 2: Circular Flow and PPF Flashcards
Terminology: Mathematics
integrals
axioms
vector spaces
Terminology: Psychology
ego
id
cognitive
dissonance
Terminology: Law
promissory
estoppel
torts
venues
Terminology: Economics
supply
opportunity cost
elasticity
consumer
surplus
demand
comparative advantage
Economics trains you to…
-Think in terms of alternatives.
-Evaluate the cost of individual and social choices.
-Examine and understand how certain events and issues are related.
The economic way of thinking…
-Involves thinking analytically and objectively.
-Makes use of the scientific method.
Uses _________ to help explain how a complex, real world operates.
Abstract models
Develops ________ to evaluate the theories.
Theories, collects, and analyzes data
Economists make _______ in order to make the world easier to understand.
Assumptions
The ___________ is deciding which assumptions to make.
Art in scientific thinking
They use different assumptions to answer different questions.
Economists
Two of the most basic economic models include:
-The Circular Flow Diagram
-The Production Possibilities Frontier
A visual model of the economy that shows how pesos flow through markets among households and firms.
Circular-flow diagram
Produce and sell goods and services. Hire and use factors of production
Firms
Buy and consume goods and services. Own and sell factors of production
Households
Firms sell, Households buy
Markets for Goods and Services
Households sell, Firms buy
Markets for Factors of Production
Factors of Production
-Inputs used to produce goods and services
-Land, labor, and capital
It is 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.
Production possibilities frontier
It was named after Vilfredo Pareto, an Italian economist who used the concept in his studies of economic efficiency and income distribution.
Pareto Efficiency
In economics, _________ is optimizing human wants within the boundaries of limited resources.
Efficiency
It occurs when no possible reorganization of production or distribution can make anyone better off without making someone else worse off.
Pareto Efficiency
What makes Pareto efficiency important?
It is commonly accepted that outcomes that are not Pareto efficient are to be avoided, and therefore Pareto efficiency is an important criterion for evaluating economic systems and public policies.
Does a change in policy to liberalize a monopoly an acceptable Pareto Efficiency?
A change aimed at improving economic efficiency may require compensation of one or more parties.
The loss of the monopolist will be more than offset by the gain in economic efficiency.
A graph showing the of production of goods and/or services that an economy can produce during a specified period of time with the consideration of the existing technology.
Production-possibility curve or product transformation curve
Shows all possible combinations of two goods that can be produced simultaneously during a given period of time
Production possibilities frontier
Assumptions in Production Possibilities Frontier (PPF)
- There are only two goods produced.
- Fixed amount of production resources at a given time.
- Resources is readily available to be transferred from one sector to another
- Technology exhibits diminishing marginal returns in the use of productive outputs.
- All productive resources are fully utilized.
Assumption: There are only two goods produced.
Comparison of one good and the other as one good or other goods
Assumption: Fixed amount of production resources at a given time.
A trade-off between two goods and/or services.
Assumption: Technology exhibits diminishing marginal returns in the use of productive outputs.
Cannot produce an indefinite constant per unit
States that in all productive processes, adding more of one factor of production, while holding all others constant, will at some point yield lower per-unit returns.
Diminishing marginal returns
An economy is ________ if it is inside the PPF
Inefficient
Outside the PPF, it is ____________
Not feasible
An __________ economy is within the PPF
Efficient
Concepts Illustrated by the Production Possibilities Frontier
-Efficiency
-Tradeoffs
-Economic Growth
Focuses on the individual parts of the economy. How households and firms make decisions and how they interact in specific markets
Microeconomics
Looks at the economy as a whole. Economy-wide phenomena, including inflation, unemployment, and economic growth.
Macroeconomics
When economists are trying to explain the world, they are __________.
Scientists
When economists are trying to change the world, they are ________.
Policy advisor
Statements that attempt to describe the world as it is. Called descriptive analysis
Positive statements
Statements about how the world should be. Called prescriptive analysis
Normative statements
Positive or Normative Statements?
- An increase in the minimum wage will cause a decrease in employment among the least-skilled.
POSITIVE
Positive or Normative Statements?
- Higher federal budget deficits will cause interest rates to increase.
POSITIVE
Positive or Normative Statements?
- The income gains from a higher minimum wage should pay higher taxes to the government since this will help the economy to grow in terms of government expenditures.
NORMATIVE
Positive or Normative Statement
-State governments should be allowed to collect from tobacco companies the costs of treating smoking-related illnesses among the poor.
NORMATIVE
Serve as advisers in the policymaking process of the three branches of government: (Legislative, Executive, Judicial)
Economists in the Philippines
Why Economist Disagree with the policy
-They may disagree about the validity of alternative positive theories about how the world works.
-They may have different values and, therefore, different normative views about what policy should try to accomplish.
Economics is divided into two subfields:
-Microeconomists study decision making by households and firms in the marketplace.
-Macroeconomists study the forces and trends that affect the economy as a whole.
When economists make __________, they are acting more as policy advisors than scientists.
Normative statements
Economists who advise policymakers offer conflicting advice either because of
Differences in scientific judgments or because of differences in values.
At other times, economists are united in the advice they offer, but
Policymakers may choose to ignore it.
An assertion about how the world is.
Positive Statement
An assertion about how the world ought to be.
Normative Statement
