Chapter 2-Thinking like an economist-Class notes

Chapter 2-Thinking like an economist-Class notes - ECO 201...

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1 ECO 201 Principles of Microeconomics Chapter 2. Thinking like an Economist 1) Economic Models a. Circular-flow diagram i. Input, outputs ii. Market for goods and services iii. Market for factors of production b. Production Possibility Frontier i. PPF for one person ii. Opportunity cost iii. Absolute advantage iv. Comparative advantage v. PPF for a 2 people economy vi. PPF for a 3 people economy etc. vii. Bowed-out PPF viii. Factors that shift P.P.F. outward overtime 2) Positive and Normative Statements Chapter 2. Thinking like and Economist 1) Economic Models Model = simplification of reality for easier understanding of reality Assumptions= 2 countries and 2 goods Make assumptions and build simplified models to understand the world around.
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2 a. Circular-flow diagram Shows: - how the economy is organized - how participants interact with each others Inputs (Factors of production, F.P.)= commodities used to produce goods and services (G&S) 1. Land (natural resources) - RENT 2. Labor (human time spent in production) –WAGE 3. Capital (machineries, tools, buildings) – INTEREST 4. Entrepreneurship (leadership) – PROFIT Outputs = G&S that result from the production process - consumed - inputs in the production process Market for goods and services (Mk for G&S) Market for factors of production (Mk for FP)
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3 b. Production Possibility Frontier (P.P.F.) PPF= a graph showing combinations of output that can be obtained by an economy, given the available resources and technology. Assume:
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This note was uploaded on 04/29/2010 for the course ECO 201 taught by Professor Saravia during the Spring '08 term at American University of Sharjah.

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Chapter 2-Thinking like an economist-Class notes - ECO 201...

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