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