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Chapter 2
Vocabulary & Key Concepts
28
Economics
12th Grade
01/29/2013

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Term
model
Definition
a simplified representation of a real situation that is used to better understand real-life situations
Term
other things equal assumption
Definition
all other relevant factors remain unchanged
Term
production possibility frontier
Definition
illustrates the trade-offs facing an economy that produces only goods; it shows the maximum quantity of one good that can be produced for any given quantity produced of the other
Term
factors of production
Definition
resources used to produce goods & services
Term
technology
Definition
the technical means for producing goods & services
Term
comparative advantage
Definition
if the opportunity cost of producing the good or service is lower for an individual than for other people
Term
absolute advantage
Definition
if an individual can do an activity better than other people
Term
barter
Definition
people directly exchange goods or service that they have for goods or services that they want
Term
circular-flow diagram
Definition
represents the transactions in an economy by flows around a circle
Term
household
Definition
a person or a group of people that share their income
Term
firm
Definition
an organization that produces goods & services for sale
Term
markets for goods & services
Definition
where firms well goods & services that they produce to households
Term
factor markets
Definition
where firms buy the resources they need to produce goods & services
Term
income distribution
Definition
the way in which total income is divided among the owners of the various factors of production
Term
most economic _____ are "thought experiments", or simplified representations of reality
Definition
models
Term
most economic models rely on the _____
Definition
other things equal assumption
Term
an important economic model is the _____, which illustrates the concepts of efficiency, opportunity cost, & economic growth
Definition
production possibility frontier
Term
_____ is a model that explains the sources of gains from trade
Definition
comparative advantage
Term
comparative advantage is often confused with _____
Definition
absolute advantage
Term
in the simplest economies people _____ rather than trade with money as in a modern economy
Definition
barter
Term
the _____ illustrates the transactions within the economy as flows of goods & services, factors of production, & money between households & firms
Definition
circular-flow diagram
Term
transactions in an economy occur in _____ and _____
Definition
markets for goods & services; factor markets
Term
ultimately, factor markets determine the economy's _____, how total income is divided among the owners of the various factors of production
Definition
income distribution
Term
positive economics
Definition
the branch of economic analysis that describes the way the economy actually works
Term
normative economics
Definition
makes prescriptions about the way the economy should work
Term
forecast
Definition
a simple prediction of the future
Term
economists do mostly _____, analysis of the way the world works, in which there are definite right & wrong answers & which involve making _____
Definition
positive economics; forecast
Term
in _____, which makes prescriptions about how things ought to be, there are often no right answers & only value judgments
Definition
normative economics
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