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econII - CHAPTER 2 Economic Models Trade-offs and Trade...

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CHAPTER 2 Economic Models:  Trade-offs and Trade
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What you will learn in this chapter: Why  models?    Simplified representations of reality play a crucial role  in economics. Three simple but important models: Production possibility frontier Comparative advantage Circular-flow diagram The difference between  positive economics  and  normative economics. When economists agree and why they sometimes  disagree.
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Models in Economics model  is a simplified representation of a real  situation that is used to better understand real-life  situations. Create a real but simplified economy Ex.: Cigarettes in World War II prison camps Simulate an economy on a computer Ex.: Tax models, money models The “ other things equal” assumption  means that  all other relevant factors remain unchanged.
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Trade-offs: The Production Possibility  Frontier   (PPF) The  production possibility frontier (PPF)  illustrates  the trade-offs facing an economy that produces only  two goods. It shows the maximum quantity of one 
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