CHP. 2 - Economic models: Trade/trade Off Flashcards
Model
A simplified representation of a real life situation that is used to better understand real life situations
Other things equal assumption
In the development of a model, the assumption that all other relevant factors remain unchanged
Thought experiments
The most effective form of an economic modeling
Simplified, hypothetical versions of reality life situations
The three most useful economic models are:
- Production possibility frontier (PPF)
- Comparative advantage
- Circular-flow diagram
Production possibilities frontier (PPF)
A diagram that shows the combinations of two goods that are possible for a society to produce at full employment
What does the PPF help us understand about some aspects of the real economy?
Efficiency, economic growth and opportunity cost
Efficiency
An economy is efficient if there are no missed opportunities
What does it mean if an economy is efficient in production?
There are no missed opportunities in production, (no wasted resources.)
It cannot produce more of one good without producing less is something else, if it’s on the PPF.
When is an economy in efficient in production?
It could produce more of some things without producing less of others.
When is an economy efficient and allocation?
If it allocate its resources, so that consumers are as well off as possible.
Efficiency requires both efficiency in:
Production and efficiency in allocation.
Opportunity cost
What must be given up in order to get a good
Give up=opportunity cost
Economic growth
An expansion of the economies production possibilities
What causes economic growth?
- Increase in factors of production: resources used to produce goods and services, (land, labor, physical capital and human capital.)
- Better technology: the technical means for producing goods and services
