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Intro to Macro; Chapter 2
Economic Models: Trade-offs and Trade
15
Economics
Undergraduate 2
02/02/2008

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Term
model  
Definition
any simplified representation of reality that is used to better understand real-life situations
Term
the other things equal assumption
Definition
condition by which all other relevant factors remain unchanged
Term
production possibility frontier
Definition
illustrates the trade-offs facing an economy that produces only two goods.  it shows the maximum quantity of one good that can be produced for any given quantity produced by the other
Term
comparative advantage
Definition
an individual has a comparative advantage in producing a good or service if the opportunity cost of producing the good is lower for that individual than it is for other people
Term
absolute advantage
Definition
an individual has an absolute advantage in an activity if he or she can do it better than other people.  Having an absolute advantage is not the same thing has having a comparative advantage
Term
barter
Definition
form of trade in which people directly exchange goods or services that they have for goods and services that they want
Term
circular-flow diagram
Definition
a model that represents the transactions in an economy by flows around a circle
Term

household

     

Definition
a person or group of people that share their income
Term
firm
Definition
an organization that produces goods and services for sale
Term
markets for goods and services
Definition
where firms sell goods and services that they produce to households
Term
factors of production
Definition
the resources needed to produce something (not used up in production; sewing machine, not cloth)
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
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