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01:220:102 (14)
Chapter 2

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Department
Economics
Course
01:220:102
Professor
Thomas Prusa
Semester
Fall

Description
Chapter 2- Economic Models: Trade-offs and Trade 2-1  Model- simplified representation of a real situation that is used to better understand real-life situations  Other things equal assumption- all other relevant factors remain unchanged  Production possibility frontier- illustrates the trade-offs facing an economy that produces only two goods o Shows the maximum quantity of one good that can be produced for any given quantity produced of the other  Factors of production- resources used to produce goods and services  Technology- technical means for producing goods and services  Comparative advantage- opportunity cost of producing the good or service is lower for that individual than for other people  Absolute advantage- he or she can do it better than other people  Barter- people directly exchange goods and services that they have for goods and services that they want  Circular-flow diagram- represents transactions in an economy by flows around a circle o Household- person or group of people that share their income o Firm- organization that produces goods and services for sale o Markets for goods and services- firms sell goods and services that they produce to households o Factor markets- firms buy the resources they need to produce goods and services  Income distribution- way in which total income is divided among owners of the various factors of production 2-2  Positive economics- branch of economic analysis that describes the way the economy actually works  Normative economics-makes presumptions about the way the economy should work  Forecast- simple prediction of the future  Reasons economics disagree o About which simplification to make in a model o About values Graphs in Economics  Variable- quantity that can take on more than one value  Horizontal axis (x-axis)- line along which values of the x-variable are measured  Vertical axis (y-axis)- line along which variables of the y-variable are measured  Origin- point where the axes of a two-variable graph meet  Causal relationship- exists between two variables when the value taken by one variable directly influences or determines the value taken by the other variable  Independent variable- determining variable  Dependent variable- variable it determines  Curve- line on a graph that depicts a relationship between two variables o Straight line or a curved line o If curve is straight line  variables have linear relationship o If curve is not a straight line  variables have nonlinear relations
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