Unit 2 key points - A model is a simplified representation...

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A model is a simplified representation of a real situation that is used to better understand real-life situations. The other things equal assumption means that all other relevant factors remain unchanged. The 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 produced of the other. The Production Possibility Frontier The production possibility frontier illustrates the tradeoffs facing an economy that produces two goods. It shows the maximum quantity of one good that can be produced given the quantity of the other good produced. Here, the maximum number of coconuts that Tom can gather depends on the number of fish he catches, and vice versa. His feasible production is shown by the area inside or on the curve. Production at point C is feasible but not efficient. Points A and B are feasible and efficient, but point D is not feasible. Increasing Opportunity Cost The bowed-out shape of the production possibility frontier reflects increasing opportunity cost. In this example, to produce the first 20 fish, Tom must give up 5 coconuts. But to produce an additional 20 fish, he must give up 25 more coconuts. Economic Growth Economic growth results in an outward shift of the production possibility frontier because production possibilities are expanded. The economy can now produce more of everything. For example, if production is initially at point A (20 fish and 25 coconuts), it could move to point E (25 fish and 30 coconuts). An individual has a comparative advantage in producing a good or service if the opportunity cost of producing the good is lower for that individual than for other people. An individual has an absolute advantage in an activity if he or she can do it better than other people. Having an absolute advantage is not the same thing as having a comparative advantage. misunderstanding
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This note was uploaded on 05/18/2010 for the course BU204 MACROECONO taught by Professor Joseruiz during the Spring '09 term at Kaplan University.

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Unit 2 key points - A model is a simplified representation...

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