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Unformatted text preview: M icroeconomics Chapter 2 1. Economic models Trades and trade offs- Model: 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- Production possibilities frontier: illustrates the tradeoffs facing an economy that produces only two goods. I t shows the maximum quantity of one good that can be produced for any given quantity produced of the other. - Comparative advantage: a model that clarifies the principle of gains from trade- individuals and between countries- Circular flow diagram: schematic representation that helps us understand how flows of money, goods, and services are channeled through the economy 2. Tradeoffs: The production possibilities frontier- Efficiency: Economy is efficient if there are no missed opportunities- there is no way to make someone better off without making someone worse off Efficiency also requires an economy to allocate its resources so that consumers are as well off as possible- Opportunity Cost: the cost of something is what we give up to get it Whenever we assume that the opportunity cost of an additional unit of a good doesnt change regardless of the output mix, the production possibilities frontier is a straight line...
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This note was uploaded on 09/12/2011 for the course ECO 2023 taught by Professor Underwood-caputo during the Spring '08 term at University of Central Florida.
- Spring '08