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Presentation 3 - Introduction to microeconomics Friday,...

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Unformatted text preview: Introduction to microeconomics Friday, August 28, 2009 Definition: A model is a simplified representation of a real situation that is used to better understand real-life situations. Models allow economists to see the effects of only one change at a time holding other things equal, meaning that all other relevant factors remain unchanged. . (Comparative statics) Economic models make use of mathematical tools, especially graphs. (You should review appendix to Chapter 2). Economists can determine correct answers for positive questions, but typically not for normative questions, which involve value judgments. The exceptions are when policies designed to achieve a certain prescription can be clearly ranked in terms of efficiency . It is important to understand that economists dont use complex models to show how clever they are , but rather because they are not clever enough to analyze the real world as it is. A simple model that demonstrates the concepts of scarcity, opportunity cost, efficiency, trade-offs and choice. A model that is useful to demonstrate concept of comparative advantage and gains from trade. The PPF shows the maximum quantity of one good that can be produced with available resources and technology for any given production of the other. Lets assume a very simple production function: Tom cab produce 3 coconuts in one hour Tom can produce 4 fish in one hour Toms resource endowment: Tom has 10 hours of time per day to spend in producing coconuts and fish....
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Presentation 3 - Introduction to microeconomics Friday,...

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