Economic Models Flashcards
model
a simplified representation of a real situation that is used to better understand real-life situations
other things equal
all other relevant factors remain unchanged; only one variable allowed to change at a time
what is a PPF
Production Possibility Frontier: diagram that shows combination of two goods that are possible for a society to produce at full employment
PPF diagram: all points under the curve are _______
feasible (but no efficient)
PPF diagram: all points above the curve are _______
not feasible
PPF diagram: all points on the curve are __________
feasible and efficient
what does an outward movement of a PPF indicate?
the economy can produce an increased number of goods
what are the two possible reasons for economic growth?
1) increase in factors of production (resources used to produce goods and services)
2) better tech (technical means for producing goods and services)
what are the 4 factors of production?
1) Land: natural resources, e.g. water and oil
2) Labour: mental/physical capabilities of workforce
3) Physical capital: manufactured items used to produce other goods and services
4) Human capital: the educational achievements and skills of the labour force (increases labour productivity)
a country has a comparative advantage in producing goods for which it has the _______________
lowest opportunity cost
why should countries trade?
it makes sense to specialise in the things you’re good at producing and buy everything else from others
absolute advantage
a country can produce more output per worker than other countries
double coincidence of wants
occurs when two parties each possess an item the other wants (foundation of barter economies)
