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econ ch. 2

# econ ch. 2 - -A MODEL is a simplified representation of a...

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1-A MODEL is a simplified representation of a real situation that is used to better understand real- life situations - the importance of models is that they allow economists to focus on the effects of only once change at a time -that is, they allow us to hold everything else constant and study how one change affects the overall economic outcome -the OTHER THINGS EQUAL ASSUMPTION means that all other relevant factors remain unchanged - for many purposes, the most effective form of economic modeling is the construction of “thought experiments”: simplified hypothetical versions of real-life situations - however, because much of economics involves changes in quantities–in the price of a product, the number of units produced, or the number of workers employed in its production— economists often find that using some mathematics helps clarify an issue TRADE-OFFS: THE PRODUCTION POSSIBILITY FRONTIER -PRODUCTION POSSIBILITY FRONTIER illustrates the trade-offs facing an economy that produces only two goods. It shows the maximum quantity of one good that can be produced for any given quantity of the other -if a production point lies inside or on the frontier it is FEASIBLE -a production point that lies outside the frontier is NOT FEASIBLE -the PPF is also useful as a reminder of the fundamental point that the true cost of any good is not just the amount of money it costs to buy, but everything else in addition to money that must be given up in order to get that good – the opportunity cost -the bowed out shape reflects an assumption about how many opportunity costs change as the mix of output changes -the arrows in figure 2-2 illustrate the fact that with this bowed-out PPF, tom faces increasing

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econ ch. 2 - -A MODEL is a simplified representation of a...

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