PEco Module 2

• Economists play two roles: scientists who try to explain the world and policy advisors who try to improve it.
• Economists employ the scientific method as scientists.
• Economists use models to study economic issues, which are highly simplified representations of a more complicated reality.
• As policy advisers, economists make normative statements.
• Differences in scientific judgments can lead to differences in values.
• A positive statement is an assertion about how the world is.
• A normative statement is an assertion about how the world ought to be.
• Economists sometimes offer conflicting advice.
• The Circular Flow diagram illustrates the roles of households and firms in the economy.
• The production possibilities frontier is a graph that illustrates the combinations of output that the economy can possibly produce, given the available factors of production and technology.
• The opportunity cost of one good in terms of the other is represented by the slope of the production possibilities frontier.
• A tax cut is needed to stimulate the economy.
• The slope of a line equals the "rise" over the "run".
• The government should print less money.
• Economists are scientists who make appropriate assumptions and build simplified models.
• Economic growth shifts the PPF outward.
• The PPF is bowed outward when different workers have different skills, different opportunity costs of producing one good in terms of the other, and there is some other resource, or mix of resources with varying opportunity costs.
• Economists often give conflicting policy advice because they can disagree about the validity of alternative positive theories about the world and may have different values and, therefore, different normative views about what policy should try to accomplish.
• In England, the opportunity cost of cloth is lower than in France.
• A bowed-outward PPF indicates an increasing opportunity cost.
• An increase in the price of burritos will cause an increase in consumer demand for music downloads.
• With additional resources or an improvement in technology, the economy can produce more computers, more wheat, or any combination in between.
• The circular-flow diagram and the production possibilities frontier are tools used by microeconomists who study decision making by households and firms and their interactions in the marketplace.
• The opportunity cost of 1 computer is 10 tons of wheat.
• Macroeconomists study the forces and trends that affect the economy as a whole.
• A straight line on the PPF indicates a constant opportunity cost.
• As more units of a good are produced, we need to give up increasing amounts of the other good produced.
• Prices rise when the government increases the quantity of money.