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Questions and Answers
Economists use models, such as diagrams and equations, to simplify and understand complex real-world phenomena.
Economists use models, such as diagrams and equations, to simplify and understand complex real-world phenomena.
True
The circular-flow diagram shows how households and firms interact in the markets for goods, services, and factors of production.
The circular-flow diagram shows how households and firms interact in the markets for goods, services, and factors of production.
True
In the circular-flow diagram, households are sellers of goods and services, while firms are buyers of factors of production.
In the circular-flow diagram, households are sellers of goods and services, while firms are buyers of factors of production.
False
The Production Possibilities Frontier (PPF) represents combinations of two goods that an economy can produce using all its available resources.
The Production Possibilities Frontier (PPF) represents combinations of two goods that an economy can produce using all its available resources.
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The slope of the PPF reflects the opportunity cost of one good in terms of the other.
The slope of the PPF reflects the opportunity cost of one good in terms of the other.
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Moving along the PPF involves shifting resources from producing one good to producing another, illustrating trade-offs.
Moving along the PPF involves shifting resources from producing one good to producing another, illustrating trade-offs.
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The opportunity cost of producing one more unit of a good always remains constant.
The opportunity cost of producing one more unit of a good always remains constant.
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Points outside the PPF represent feasible levels of production for the economy.
Points outside the PPF represent feasible levels of production for the economy.
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Economic growth can shift the PPF outward by increasing available resources or improving technology.
Economic growth can shift the PPF outward by increasing available resources or improving technology.
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A straight-line PPF indicates a constant opportunity cost between two goods.
A straight-line PPF indicates a constant opportunity cost between two goods.
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Study Notes
Economic Models
- Economists use simplified models to understand complex economic phenomena.
- These models can be diagrams, equations, or other representations.
- The circular-flow diagram illustrates how households and firms interact in markets.
The Circular-Flow Diagram
- The circular-flow diagram has two main participants: households and firms.
- Households are sellers of factors of production (labor, land, capital, and entrepreneurial ability) and buyers of goods and services.
- Firms are buyers of factors of production and sellers of goods and services.
The Production Possibilities Frontier (PPF)
- The PPF represents the various combinations of two goods that an economy can produce using its available resources and technology.
- The PPF is a curve, and points on the curve represent efficient production.
- Points inside the PPF represent inefficient production, while points outside the PPF represent unattainable production levels given current resources.
Opportunity Cost on the PPF
- The slope of the PPF represents the opportunity cost of producing one good in terms of the other.
- Opportunity cost is the value of the next best alternative forgone.
- Moving along the PPF involves shifting resources from producing one good to another, illustrating trade-offs.
Economic Growth and the PPF
- Shifts in the PPF represent economic growth.
- Economic growth can occur through increases in available resources or technological advancements.
- Increases in resources, such as labor or capital, or improvements in technology, allow the economy to produce more of both goods.
Shape of the PPF
- A straight-line PPF indicates a constant opportunity cost for producing one good in terms of the other.
- This means the resources used for producing both goods are equally adaptable and interchangeable.
- A bowed-out PPF indicates increasing opportunity costs.
- This suggests that resources are not perfectly interchangeable, and as more resources are shifted towards one good, the opportunity cost of producing more of that good increases.
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