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Describe the key difference between positive and normative statements.
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Positive statements describe the world as it is without opinions or value judgments, whereas normative statements include opinions and value judgments.
What are the two primary roles of an economist, as described in economic theory?
An economist acts as a scientist, describing the world as it is, and as a policy adviser, suggesting improvements for society.
Why are assumptions necessary in economic models?
Assumptions allow economists to simplify complex realities to focus on causal relationships and better understand how different elements of the economy interact, despite being unrealistic.
What does it mean when a point lies on, inside, or outside the PPF?
A point on the PPF is efficient, a point inside is inefficient, and a point outside is not feasible under current resources and technology.
Explain what a Production Possibilities Frontier (PPF) illustrates.
A PPF graphically shows the maximum combinations of two goods that can be produced with available resources and technology, illustrating concepts like efficiency, feasibility, opportunity cost, and trade-offs.
Differentiate between microeconomics and macroeconomics.
Microeconomics focuses on individual markets and the decision-making of individuals and firms, while macroeconomics looks at the economy as a whole, dealing with aggregates like GDP, unemployment rates, and inflation.
Define 'Factors of Production' and list the types included.
Factors of production are inputs used in the production of goods and services, including labor (L), capital (K), human capital (H), and natural resources (N).
What assumptions are typically made in economic models like the Circular Flow Diagram and the PPF?
Economic models often simplify reality, assuming scenarios such as only two countries trading only two goods, to better understand causal relationships.
What role does human capital play in production and economic models?
Human capital refers to the education, skills, and expertise of labor, contributing to increased productivity and economic efficiency in production processes.
How does the Circular Flow Diagram illustrate interactions between households and firms?
The Circular Flow Diagram shows the monetary flow from firms to households in the form of wages, rent, etc., and the flow of goods and services, with firms selling goods and households purchasing them.
How is opportunity cost represented in a Production Possibilities Frontier?
Opportunity cost is represented by the slope of the PPF; the slope indicates how much of one good must be sacrificed to increase production of another good.
What is the significance of a bowed out PPF compared to a linear PPF?
A bowed-out PPF indicates increasing opportunity costs, which is more realistic due to variability in resource productivity, whereas a linear PPF implies constant opportunity costs, which is less realistic.
In the Circular Flow Diagram, what are the two types of flows represented?
The Circular Flow Diagram represents the flow of money (dollars) and the flow of goods and services and factors of production.
How can economic growth be depicted on a Production Possibilities Frontier?
Economic growth is depicted as an outward shift of the PPF, indicating increased production capabilities due to more resources or improved technology.
Who are the two primary economic agents in the Circular Flow Diagram?
The two primary economic agents are households and firms. Households own factors of production and buy goods and services, while firms buy/rent factors of production and sell goods and services.
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