Vocabulary Edit

Circular-Flow Diagram

  • Definition: A visual model of the economy that shows how dollars flow through markets among households and firms.
  • What It Means:

Production Possibilities Frontier

  • Definition: A graph that shows the combinations of output that the economy can possibly produce given the available factors of production and the available production technology.
  • What It Means:


  • Definition: The study of how households and firms make decisions and how they interact in markets.
  • What It Means:


  • Definition: The study of economy-wide phenomena, including inflation, unemployment, and economic growth.
  • What It Means:

Positive Statements

  • Definition: Claims that attempt to describe the world as it is.
  • What It Means:

Normative Statements

  • Definition: Claims that attempt to prescribe how the world should be.
  • What It Means:



Both A and B are perfectly efficient, C is impossible without a technological advance, and D is inefficient.


The Circular-Flow Diagram.