Week 2

Question 1

Assumptions

Answer 1

simplify the real (complex) world, making it easier to explain issues.

Question 2

Model

Answer 2

highly simplified representation of a more complicated reality. Economists use models to study economic issues.

Question 3

Circular-flow Diagram

Answer 3

a visual model of the economy, shows how dollars flow through markets among households and firms.

Question 4

Two actors

Answer 4

households & firms (businesses)

Question 5

Two markets

Answer 5

market for goods & services and the market for factors of production.

Question 6

Factors of production

with examples

Answer 6

resources used to produce goods and services.

• labour
• land
• capital (e.g. buildings, - machineryand equipment)

Question 7

Households

Answer 7

• own the factors of production and sell/rent them to firms for income
• buy and consume goods and services

Question 8

Firms

Answer 8

• buy or hire factors of production and use them to produce goods and services
• sell goods and services

Question 9

Production Possibilities Frontier

Answer 9

a graph that shows the combinations of two goods the economy can possibly produce given its available resources and the available technology.

Question 10

Microeconomics

Answer 10

examines how households and firms make choices and how they interact in markets

Question 11

Macroeconomics

Answer 11

examines the economy as a whole

Question 12

Positive Statements

Answer 12

attempt to describe the world as it is

Question 13

Normative Statements

Answer 13

prescribe how the world should work