What are the six key economics terms from Chapter 2?
Supply, demand, elasticity, comparative advantage, consumer surplus, deadweight loss.
What method do economists use to study the economy?
The scientific method — observation, theory, and testing with real-world data.
Why can’t economists usually run lab experiments?
It’s impractical to manipulate entire economies — they rely on natural experiments from history (e.g., COVID).
What’s the role of assumptions in economics?
Simplify complex reality to make models easier to understand and test.
What are economic models?
Simplified representations (diagrams/equations) of how the economy works, based on assumptions.
What does the Circular-Flow Model show?
How money and goods flow between households and firms in markets for goods/services and factors of production.
What are the two loops of the Circular-Flow Model?
Inner loop: goods/services; Outer loop: money flow.
What does the Production Possibilities Frontier (PPF) show?
The possible combinations of goods that can be produced given resources and technology.
What is efficiency on the PPF?
When the economy gets the most from its scarce resources — on the curve.
What does the slope of the PPF represent?
The opportunity cost of one good in terms of the other.
What happens when technology improves?
The PPF shifts outward.
Difference between microeconomics and macroeconomics?
Micro studies individuals and firms; macro studies the entire economy.
Positive vs. Normative statements?
Positive = ‘what is’; Normative = ‘what ought to be.’
Why do economists disagree?
Different scientific judgments, values, or interpretations of data.
What is absolute advantage?
When a producer can make a good using fewer inputs.
What is comparative advantage?
When a producer can make a good at a lower opportunity cost.
Can someone have a comparative advantage in both goods?
No — opportunity costs are inversely related.
Basis of gains from trade?
Comparative advantage — specialization increases total output.
What must the trade price lie between for both sides to gain?
Between their two opportunity costs.
Imports vs. Exports?
Imports = produced abroad, sold domestically; Exports = produced domestically, sold abroad.
What does a budget constraint show?
All consumption bundles a consumer can afford given income and prices.
What happens when income increases?
Budget line shifts outward.
What happens when the price of a good falls?
The budget line rotates outward for that good.
What is an indifference curve?
Shows combinations of goods that give the consumer equal satisfaction.
