econ ch 2 outline

econ ch 2 outline - Kristin Chen Ch 2 Economics Models...

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Circular flow diagram Kristin Chen Ch 2 Economics Models: Trade-offs & Trade 1. Models in Economics: Some Important Examples a. Model = a simplified representation of reality that is used to better understand real-life situations b. other things equal assumption = all other relevant factors remain unchanged 2. Trade-offs: The Production Possibility Frontier a. Production possibility frontier = illustrates the trade-offs facing an economy that produces only two goods. Show the maximum quantity of one good that can be produced for any given quantity produced of the other 3. Comparative Advantage & Gains from Trade a. Comparative advantage = when the opportunity cost of producing a good is lower for that individual than other people i. Basis for mutual gain ii. Important for countries b. Absolute advantage = the ability to produce a particular good or service better than anyone else 4. Transactions: The Circular-flow Diagram a.
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