Chapter 2:

Question 1

Model

Answer 1

a simplified representation of a real situation that is used to better understand real-lfe situations.

Question 2

Ceteris Paribus Assumption

Answer 2

Nothing changes except the factor or factors being studied.
“Other things constant”
“Others things equal”

Question 3

PPF (Production Possibility frontier)

Answer 3

Illustrates the trade-offs facing an economy that produces only two goods. It shows the opportunity cost of one good to make the other.

Question 4

Comparative advantage

Answer 4

the opportunity cost of producing the good is lower for that individual than for other people;
a country usually wants to import goods that it has a comparative disadvantage in producing and export goods that it has a comparative advantage in producing

Question 5

Absolute advantage

Answer 5

if he or she can do it better than other people. DON’T CONFUSE ABSOLUTE WITH COMPARATIVE ADVANTAGE

Question 6

Circular-Flow Diagram (CFD)

Answer 6

a model that represents the transactions in an economy by flows around a circle; simplest CFD illustrates an economy that contains only two kinds of inhabitants: households and firms.

Question 7

Positive Analysis

Answer 7

statements that attempt to describe the world as it is (= descriptive analysis)

Question 8

Normative Analysis

Answer 8

statements about how the world should be

= prescriptive analysis

Question 9

Efficiency (PPF)

Answer 9

1. there are no missed opportunities in production
2. there is no way to produce more of one good without producing less of other goods
3. Any point that is on the line in a graph for a PPF is both feasible and efficient
4. any point that is to the left of the line is feasible but inefficient

Question 10

opportunity cost

Answer 10

indicates that doing or making one thing comes at the price of doing or making something else;
On a PPF graph, if the graph slope is straight (no curves) = the opportunity cost is always constant; if slope is curved, then opportunity cost is always different

Question 11

Economic growth

Answer 11

growing ability of the economy to produce goods and services; in a PPF, it is indicated by a shift rightward

Question 12

Factors of production

Answer 12

1. the resources used to produce goods/services
2. every source that is not used up in production
3. Main factors: land, labor, physical capital, human capital

Question 13

technology

Answer 13

technical means for the productions of goods/services

Question 14

Gains from trade

Answer 14

mutual gains that individuals can achieve by specializing in doing different things and trading with one another.

Question 15

income distribution

Answer 15

how the total income created in an economy is allocated between less and highly skilled workers, and the owners of capital and land