Week 2: demand and supply Flashcards
Economic Models
• simplify economic reality
• show how dependent variables are affected by independent variables
• include inverse and/or direct relationships
• incorporate a variety of assumptions such as ceteris paribus
• are classified as part of either positive economics or normative economics
Independent variable
causes dependent variable to change
Dependent variable
affected by the independent variable
Direct relationship
if the independent goes up/down dependent goes up/down
Inverse relationship
if the independent goes up the dependent goes down and vice versa
Ceteris paribus
all other things stay the same
Positive economics
• the study of economic facts and why the economy operates as it does
• explains what’s happening in ex. inflation
• descriptive
Normative economics
• the study of how the economy should operate
• what can we do to maintain ex. inflation
ex. we should reduce taxes
Production Possibilities Model
based on 3 assumptions:
- an economy makes only two products (ex. apples and oranges)
- resources and technology are fixed (ceteris paribus)
- all resources are employed to their fullest capacity
Production Possibilities Curve
• how a range of possible output combinations for an economy
• highlights the scarcity of resources
• has a concave shape, which reflects the law of increasing opportunity costs
Bullets and Bread Graph
• resources used to only make bullets will lead to no resources to make bread
• law of increasing opportunity costs
• point O violates limited resources (not using resources to the fullest capacity)
• point P is not possible bc its using resources you don’t have and bc of ceteris paribus (has to have economic growth to happen)
Law of increasing opportunity costs
as more of one item is produced by an economy, the opportunity cost of additional units of that product rises
ex. as the quantity of bread rises, so does its opportunity cost
Economic growth
• an increase in an economy’s total output of goods and services
• the production possibilities curve shifts outwards (to the right) due to more resources or an improvement in technology
• the economy moves from a point within the area bounded by the production possibilities curve to the curve itself
shift to the right
• = growth
• caused by innovation, finding new land or resources, new tech
Economic contraction
• the production possibilities curve shifts inward (to the left)
• the economy moves from a point on the production possibilities curve to a point within the area bounded by the curve
