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Positive statement
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Can be tested and validated; it describes "what is"; economists deploy positive analysis to be as objective as possible
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Economic model
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Should be simple to understand, flexible in design, and make powerful predictions; provide frameworks that enable us to predict the effect that changes in prices, production processes, and government policies have on real-life behavior
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Ceteris paribus
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"Other things being equal"; The concept under which economists examine a change in one variable while holdings everything else constant
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Normative statement
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An opinion that cannot be tested or validated; it describes "what ought to be"
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endogenous factors
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variables that can be controlled for in a model; factors that we know about and can control
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exogenous factors
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factors beyond our control outside the model; variables that cannot be controlled for in a model
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in building an economic model, what three factors do we need to be mindful of?
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what we include in the model; the assumptions we make when choosing what to include in the model; the outside conditions that can affect our model's performance
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the danger of faulty assumptions
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models can be useful, but they are also potentially dangerous; because a model is always a simplification, decision-makers must be careful about assuming that a model can present a solution for complex problems
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production possibilities frontier
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a model that illustrates the combinations of outputs that a society can produce if all of its resources are being used efficiently; in order to preserve ceteris paribus, we assume that the technology available for production and the quantity of resources remain constant
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The production possibilities frontier for pizza and wings (describe the graph)
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the production possibilities frontier shows the trade-off between producing pizzas and producing wings; any combination of pizza and wings is possible along or inside the curve; points outside the curve are not possible with the current set of resources; points inside the curve are inefficient
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law of increasing relative cost
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illustrated by a bowed-out production possibilities frontier and reflects the increasing opportunity cost of production; states that the opportunity cost of producing a good rises as society produces more of it
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changes in relative cost
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by the law of increasing relative cost, mean that a society faces a significant trade-off if it tries to produce an extremely large amount of a single good
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economic growth
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the process that enables a society to produce more output in the future; we can use the production possibilities frontier to explore economic growth
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new technology creates a shift in the production possibilities frontier ex. new pizza assembly line
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a new pizza assembly line that improves the productive capacity of pizza-makers shifts the production possibilities frontier upward because more pizza can be produced; enhanced pizza-making capacity also makes it possible to produce more wings at the same time; max pizza increases, but max wings stays the same
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more resources and the production possibilities frontier; ex. pizza and wings
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when more resources are available for the production of either pizza or wings, the entire production possibilities frontier shifts upward and outward; max pizza and max wings both increase
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absolute advantage
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refers to the ability of one producer to make more than another producer with the same quantity of resources
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specialization
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greater individual, specialized output than the combined output; leads to greater productivity; in spite of one's absolute advantage in making two goods, he is still better off trading; when they spend their time on what they do best, they are able to produce more collectively and then divide the gain; enables workers to enjoy gains from trade
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comparative advantage
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the ability to make a good at a lower cost than another producer; in order to have something valuable to trade, each producer must find its comparative advantage
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gaining from trade
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as long as the terms of trade or the ratio fall between the opportunity costs of the trading partners, the trade benefits both sides
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consumer goods
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any good that is produced for present consumption; help satisfy our wants now
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capital goods
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help produce other valuable goods and services in the future
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investment
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the process of using resources to create or buy new capital; with more investment in new capital, the long-run production possibilities curve expands outward much more than with little investment in capital goods
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importance of trade in society
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voluntary trades will maximize society's wealth by redistributing goods and services to people who value them the most; trade and growth rest on the fundamental idea of specialization; trade creates value and contributes to an improved standard of living in society
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scatterplot
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a graph that shows individual (x,y) points
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positive correlation
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occurs when two variables move in the same direction
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negative correlation
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occurs when two variables move in the opposite direction
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causality
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occurs when one variable influences the other
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reverse causation
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occurs when causation in incorrectly assigned among associated events
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