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Chapter 2
Economic Models: Trade-off's and Trade
18
Economics
Undergraduate 1
10/21/2008

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Term
Positive Economic Statement
Definition
A statement that can be proved or disproved by reference to facts.
Term
Normative Economic Statement
Definition
Statement that represents an option, which cannot be proved or disproved.
Term
Association-is-causation Fallacy
Definition
the incorrect idea that if two variable are associated in time, one must necessarily cause the other.
Term
Fallacy of Composition
Definition
the incorrect belief that what is true for the individual, or part must necessarily be true for the group, or whole.
Term
Secondary effects
Definition
unintended consequences of economic actions that may develop slowly over time as people react to events.
Term
Opportunity Costs
Definition
the value of the best alternative forgone when an item or activity is chosen.
Term
Sunk cost
Definition
a cost that has already been incurred in the past. cannot be recovered, and thus is irrelevant for the present and future economic decisions.
Term
Law of comparative advantage
Definition
the individual, firm, region, or country with the lowest opportunity cost of producing a particular good should specialize in that good. (David Riccardo)
Term
Absolute Advantage
Definition
The ability to produce something using fewer resources than other producers use. (Adam Smith, Wealth of Nations 1776)
Term
Comparative Advantage
Definition
the ability to produce something at a lower opportunity cost than other producers face.
Term
Barter
Definition
The direct exchange of one good for another without using money.
Term
Division of Labor
Definition
organizing production of a good into its separate tasks.
Term
Specialization of Labor
Definition
focusing on work effort in a particular product or a single task.
Term
Productions Possibilities Frontier (PPF)
Definition
a curve showing the alternative combinations of goods that can be produced when available resources are used fully and efficiently; [a boundary between inefficient and unattainable combinations.]
Term
Economic Growth
Definition
An increase in the economy's ability to produce goods and services; an upward shift of the production possibilities frontier. **Technology is the main reason for EG**
Term
Pure Capitalism
Definition
an economic system characterized by the private ownership of resources and the use of prices to coordinate economic activity in unregulated markets.
Term
Mixed Stystems
Definition
an economic system characterized by the private ownership of some resources and the public ownership of other resources; some markets are unregulated and others are regulated.
Term
Pure Command System
Definition
An economic system characterized by the public ownership of resources and centralized planning.
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