# Ec201 - Krugman and Wells Chapter 2 Steven J. Haider EC201...

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Krugman Krugman and Wells and Wells Chapter 2 Chapter 2 Steven J. Haider EC201 Spring 2010

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EC201-2-p2 Models Models Models are simplified versions of reality They can help us focus on important parts of a problem A model used for one purpose may not be useful for another Example: a map This map is good for getting to Kalamazoo This map is bad for getting to Stockbridge
EC201-2-p3 Models Models Economic models tend to be mathematical We can make precise statements about the model We can use models to help us think about real life situations Key word is can —it depends on whether model includes the important pieces Models can help us focus on one piece of a problem at a time “all else equal” or “ceteris paribus” Two common pitfalls to using economic models Mistaking the model for reality—the model may not apply Dismissing all models as being “wrong”—of course the assumptions are strong, but that is how we simplify

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EC201-2-p4 Production Possibility Frontier (PPF) Production Possibility Frontier (PPF) Our first model! Set-up: person can collect coconuts or fish Trade-off is time Concepts Feasible vs. infeasible quantities PPF Efficiency Technology Opportunity cost
EC201-2-p5 Opportunity cost Opportunity cost Opportunity cost: what must be given up for something In this model, the opportunity cost of 1 fish = X coconuts Thus, to move from B to A, one gives up 8 fish for 6 coconuts, implying 1 fish = 6/8 (or ¾) coconut In this model, the opportunity cost of 1 coconut is 4/3 fish

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In top figure (2.1), the opportunity cost of X in terms of Y is the slope of the line Slope = Δ Y / Δ X (negative) The slope is constant —the opportunity cost is constant To check compare movement from (40,0) to (28,9) Generally, we think OC increases Bowed out--see bottom
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## This note was uploaded on 05/18/2010 for the course ECONOMIC Ec 201 taught by Professor Haider during the Spring '10 term at MSU - Iligan Inst of Tech.

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Ec201 - Krugman and Wells Chapter 2 Steven J. Haider EC201...

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