Econ+102+lecture+3%2C+1-12-12+-+PPF+basics copy

Econ+102+lecture+3%2C+1-12-12+-+PPF+basics copy - Required...

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Lecture 3: Production possibilities Econ 102, Winter 2012 1/12/2012 1 Required reading : Ch 2:  pp. 23-30, 35-41 (skip “trade” for now)
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Outline 1. Intro to models: ceteris paribus and simplification 2. The production possibilities frontier a. Technical Efficiency b. Productive opportunity cost 3. Economic growth 4. What to do with models? 1/12/2012 2
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Economic Models Models: simplifications to understand complex  situations and draw conclusions of cause and effect (Generally mathematical) “thought experiments” Ł  Represented graphically in this class Ceteris Paribus   assumption: “all else equal”  Hold still all relevant “moving parts” that aren’t  e.g. automobile engine In the real world, all else is  not  constant: models  are inherently false! 1/12/2012 3
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Economic Models Consider the simplest model of the macroeconomy:  the Circular Flow model . Helps to answer the questions: a. What’s the connection between the “real economy”  and money?   b. How do we measure the “size” of the economy? Setup: . 2 agents  (economic “actors”): households and firms . 2 markets and factors of production 1/12/2012 4
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Economic Models Money Factors Goods and services Factors Households Firms Ma rke ts f or goo ds an d ser vice s Factor Markets Goods and services Money Money Money 1/12/2012 5
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What do we learn? One group’s spending is another’s income barter’s necessary “double coincidence of wants” Two ways to measure economic activity: factor  The merit of models is in their simplicity: make  complex phenomena easier to understand.   But we miss things via simplification. What here? Banks, government, other countries, transactions 
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This note was uploaded on 02/10/2012 for the course ECON 102 taught by Professor Rossana during the Winter '08 term at University of Michigan.

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Econ+102+lecture+3%2C+1-12-12+-+PPF+basics copy - Required...

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