CHAPTER 2 - CHAPTER 2 ECONOMIC MODELS Economists base their studies in models In general a model is a simplified representation of a real situation

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CHAPTER 2. ECONOMIC MODELS Economists base their studies in models . In general, a model is a simplified representation of a real situation. The usefulness of a model is that it leaves out all the details that are not relevant to the subject, but rather it concentrates in the most important aspects of it. For instance, an architect that presents a design of a building uses a model of it to illustrate how it would look like. For the model to work it only needs to show a small-scale representation of the building, but it does not have to have small-scale representations of the other buildings next to and in front of the building in question. These would be extra details that can be ignored. A similar situation occurs in economics. An economic phenomenon may depend on many factors, but only a few of them are really worth of attention. Other less important variables may be left out and still the model would have good explanatory power. In fact, by not including small details, models become easier to understand. In economics models are usually put in equations because equations give more clarity about what the author has to say (words can be misinterpreted). Graphs are another way to present models. Graphs have the advantage that they are accessible to a wider public. In this chapter the text presents three important models: The production possibility frontier, the model of comparative advantage, and the circular flow model. PRODUCTION POSIBILITIES FRONTIER A production possibilities frontier shows the combinations of outputs X and Y that an economy is able to produce given the available factors of production (land, labor, and capital) and a given production technology. Good Y
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This note was uploaded on 04/08/2008 for the course ECON 120 taught by Professor Serpa during the Spring '08 term at Ill. Chicago.

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CHAPTER 2 - CHAPTER 2 ECONOMIC MODELS Economists base their studies in models In general a model is a simplified representation of a real situation

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