Chapter 2 - ceteris poribus Ex 1: Input Price Change (tax...

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Chapter 2: Economic Way of Thinking Choice, Trade-Off, and Opportunity A choice is a trade-off - we give up something to get something else Highest-Valued Alternative : What we give up is the opportunity cost Note: Opportunity cost is not all possible alternative forgone Economists believe that economic agents make choices a the margin and respond to incentives Marginal Change : A small or one unit change, smallest change Choices are made by evaluating marginal benefit v. marginal cost!! Marginal Benefit : The benefit that arises from a 1 unit increase in an activity Marginal Cost : The cost that arises from a 1 unit increase in an activity Incentives : An inducement to take (or not take) a particular action -- A model is not reality!!!! Models : An expression in words or equations designed to mirror the essential characteristics of the particular phenomena under study a) Models are built on assumptions. Assumptions are used to simplify the world to allow evaluation of complex questions b) Assumptions are often used to isolate variable-
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Unformatted text preview: ceteris poribus Ex 1: Input Price Change (tax everything else)- Input on the output market--Model 1 : Circular Flow Diagram (simple model provides a basic outline of a market economy) QuickTime and a decompressor are needed to see this picture. Firms : Produce and sell goods and services, Hire and use factors of production Households : Buy and consume goods and services, Own and sell factors of production Model 2 : Production Possibilities Frontier (PPF) PPF : Describes the production possibilities of any economy / : Any production bundle inside the PPF is feasible A-D are production bundles A: Its possible, Efficient B: Its possible, Inefficient C: Its possible, Efficient D: Not possible Productive Efficiency-No more of either good can be produced with reduced production of the other good-Using all resources The Shape of the PPF (Bowed Outward) Law of Increasing Opportunity Cost-Resources are not all equally productive in all activities...
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This note was uploaded on 12/10/2011 for the course ECON 221 taught by Professor Williamson during the Winter '05 term at Cal Poly.

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Chapter 2 - ceteris poribus Ex 1: Input Price Change (tax...

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