ECON 202 Chapter 2
Circular flow diagram
a visual model of the economy that shows how dollars flow through markets among households and firms
Refer to Figure 2-8. To reach point L, the economy would have to
acquire more resources or experience a technological advance.
Rent control (perception versus reality)
adversely affects the availability and quality of housing, costly way of helping the neediest members of society, many cities use rent control
negative correlation
as one variable increases, the other decreases
Economic models are built with
assumptions
trade-off
the only way to produce more of one good is to produce less of the other good
positive correlation
If both the independent variable and the dependent variable change in the same directions
Refer to Figure 2-4. Inefficient production is represented by which point(s)?
T
reverse causality
a situation in which the researcher believes that A results in a change in B, but B, in fact, is causing A
production possibilities frontier (PPF)
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
Scatterplot
a graphed cluster of dots, each of which represents the values of two variables
Coordinate system
a system used to display two variables on a single graph
Refer to Figure 2-5. If this economy devotes all of its resources to the production of dryers, then it will produce
80 dryers and 0 washers.
Refer to Figure 2-5. It is not possible for this economy to produce at point
C
Communication advisers
how best to explain it to the public
Press advisers
how the news media will report
Refer to Figure 2-5. The opportunity cost of obtaining 20 additional dryers by moving from point D to point A is
0 washers.
Two markets
1. the market for goods and services 2. the market for "factors of production" (inputs)
Refer to Figure 2-16. The opportunity cost of obtaining 30 additional gadgets by moving from point B to point A is
30 widgets.
Refer to Figure 2-14. The opportunity cost of moving from point U to point R is
60 bushels of apples.
Council of Economic Advisers
Advise the president of the United States
Refer to Figure 2-13. One difference between points F and G is that
All resources are fully employed at point F but there is unemployment at point G.
Refer to Figure 2-1. Which arrow represents the flow of goods and services?
B
Refer to Figure 2-1. Which arrow represents the flow of land, labor, and capital?
C
Refer to Figure 2-1. Harvey receives his first paycheck for working as an ice cream vendor. To which of the arrows does this transaction directly contribute?
C and D
Assumptions in Economics
Can simplify the complex world and make it easier to understand, deciding which assumptions to make is the hardest
resource specialization
Causes the bowing in bowed outward PPF; makers are better at creating one thing over another
Positive Statements
Descriptive; attempt to describe the world as it is; confirm or refute by examining evidence: "minimum-wage laws cause unemployment"
How economists are scientists
Devise theories, collect data, analyze said data, use the scientific method
The point of economic models
Diagrams and equations, omit many details, allows us to see what's truly important, built with assumptions, simplify reality to improve our understanding of it
Differences in scientific judgements
Different hunches about: 1. validity of alternative theories, 2. size of important parameters (measure how economic variables are related)
Economists may have different values
Different normative views about what policy should try to accomplish
Refer to Figure 2-13. Which of the following combinations of points are both efficient and attainable for this economy?
F,I,L
Factors of production are AKA
Inputs; labor, land, capital (buildings and machines)
Economists in Washington jobs
Office of Management and Budget, Department of the Treasury, Department of Labor, Department of Justice, Congressional Budget Office, The Federal Reserve
Bowed outward production possibilities frontier
Opportunity cost of a car is highest, OC of a car is lower
Households
Own factors of production, consume goods and services
Inefficient levels of production
Points inside production possibilities frontier
Normative Statements
Prescriptive; attempt to prescribe how the world should be: "The government should raise the minimum wage"
Firms
Produce goods and services, use factors of production (inputs)
Why we make different assumptions
To answer different questions, to study short-run or long-run effects
Economists may disagree
Validity of alternative positive theories about how the world works
Graphs serve two purposes
Visually express ideas that might be less clear if described with equations or words, provide a powerful way of finding and interpreting patterns
demand curve
a graph of the relationship between the price of a good and the quantity demanded
Economic models
can be useful, even if they are not particularly realistic.
Annual Economic Report of the President
discusses recent developments in the economy and presents the council's analysis of current policy issues
Refer to Figure 2-12. The shift of the production possibilities frontier from A to B can best be described as
economic growth.
Political advisers
effect on the electorate
Two decision makers
firms and households
Markets for goods and services
firms sell goods and services they produce to households
In the markets for goods and services in the circular-flow diagram,
households are buyers and firms are sellers.
Markets for factors of production
households are sellers and firms are buyers
In the markets for the factors of production in the circular-flow diagram,
households are sellers and firms are buyers.
Legislative affairs advisers
how Congress will view the proposal
Another term for factors of production is
inputs
In the circular-flow diagram, which of the following is not a factor of production?
money
Trade barriers (tariffs and import quotas) are ________ by economists
opposed by economists
Outward shift of the PPF
results of technological advancements and economic growth, you are producing more of BOTH goods
omitted variable
something that has been left out of a study that, if included, would explain why two variables that are in the study are correlated
efficient levels of production
the economy is getting all it can form the scarce resources available, points ON the PPF
Efficiency is illustrated by
the production possibilities frontier only.
macroeconomics
the study of economy-wide phenomena, including inflation, unemployment, and economic growth
microeconomics
the study of how households and firms make decisions and how they interact in markets
Economic advisers
what policy is best
opportunity cost
whatever must be given up to produce something else