ECON202 CHAPTER 2 Notes Cheng
• Economics is a social science.
• The Scientific Method of Economics –
o Observe economic phenomenon
o Formulate a theory/model that is testable
o Collect data and test the theory through empirical analysis
o Revise the theory if it fails to explain the data well ▪ Example: Do couples have more children when they earn more? This is a testable question that
can lead economists to an answer to this
• How does economics differ from other sciences? o While most sciences are based on facts, economics has a basis in assuming human behavior is rational. ▪ Example: How does economics explain why the $100 bill on the street will disappear? Assuming
there is no wind, a person that happens upon a
$100 bill will perform a cost/benefit analysis. Cost of picking up the $100? None, unless you feel
guilty about it. Benefit of picking up $100?
Well….you get an extra $100 with little to no work exerted.
• Economic models/theories – when trying to understand economics, the answer to most economic phenomena is knowing the causation of such phenomena. Economists are required to simplify complex human behaviors by… o Assuming away unnecessary details
o Understanding the simplest scenario first before adding complexities to it
o Making assumptions to make things simple, then relaxing (or specifying) these simple assumptions when analyzing complicated scenarios If you want to learn more check out uic econ 120 final exam
Reality (Human Behavior)
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lots of assumptions less assumptions
Simplest Model We also discuss several other topics like vaswlar
Moderate Model Complicated ModelIf you want to learn more check out uga pe classes
o The balance of economic models is extremely important.
▪ If a model is overbroad (meaning it includes too many moving variables and not enough
assumptions), an economist task of explaining a phenomenon will be almost impossible.
▪ If a model is oversimplified (meaning it includes too many assumptions), an economist will not
come to an accurate conclusion when testing his model/theory.
▪ Example: Say you need a map from your house to your next class. Do you need a map that includes all of the trees, lakes, buildings, etc all along your route? (Probably not, this would be overbroad.) What if I gave you a map with a squiggly line from point A to point B? (Not helpful either, because it’s oversimplified.)
o There are 3 ways to describe an economic model/theory. Most often, you’ll want to use all three methods in creating a model.
▪ Verbal description (in plain words) Don't forget about the age old question of world civilization study guide
▪ Mathematical equations
▪ Example: The Law of Demand
• Verbal description – Consumers buy less when the price of a good goes up (and vice versa)
• Graphical description –
• Mathematical equation (example) –
Quantity Demanded = 100 – (5 * Price)
• Production Possibilities Frontier (PPF)
o This economic model explains efficient production possibilities, or the allocation of 100% of available resources in the most profitable/beneficial way • It will demonstrate how a specific choice of
action will result in an efficient, inefficient, or
o Efficient – economy uses ALL available We also discuss several other topics like meteorology schools in texas
resources to produce a combination of
2 goods; the PPF is the set of all
efficient output combinations
o Inefficient – economy does NOT have
to use all of its resources to produce it,
meaning there are resources leftover;
this point would be plotted BELOW the
PPF line on a graph)
o Infeasible (not possible) – economy
cannot produce the combination of
goods, even if all resources are used
(this point would be plotted ABOVE the
PPF line on a graph)
o Example: Consider an economy that uses the scarce resource (labor, measured by labor hours) to produce computers and wheat. Assume the economy has 50,000 labor hours per month available for production. In addition, producing one computer requires 100 hours labor; producing one ton of wheat requires 10 hours labor. Below are five production plans in terms of allocating the 50,000 labor hours:
• A. 50,000 hours in producing computers + 0 hour in producing wheat
• B. 40,000 hours in producing computers + 10,000 hours in producing wheat
• C. 25,000 hours in producing computers + 25,000 hours in producing wheat
• D. 10,000 hours in producing computers + 40,000 hours in producing wheat
• E. 0 hour in producing computers + 50,000 hours in producing wheat
▪ From the information above, we know that we can produce 500C/0W, 400C/1000W,
250C/2500W, 100C/4000W, or 0C/5000W. This is the PPF line on the graph, because all labor hours would be used in each output scenario.
• Say you wanted to produce 100C and
3500W. This would be inefficient, because
there would be leftover labor hours that
were not used. The point would fall below PPF.
• Say you wanted to produce 300C and 3500W. This would be infeasible, because you don’t have enough labor hours available. The point would fall above PPF. Remember, resources are scarce!
Chapter 2 Homework Questions:
1. One thing economists do to help them understand how the real world works is… make assumptions.
2. Economists make assumptions to… make a complex world easier to understand.
3. An economic theory about international trade that is based on the assumption that there are only two countries trading two goods… can be useful in helping economists understand the complex world on international trade involving many countries and many goods.
4. Which of the following statements about economic models is correct?... Because economic models omit many details, they allow us to see what is truly important.
5. Suppose a nation is currently producing at a point inside its production possibilities frontier. We know that... the nation is not using all of its available resources.
6. If this economy devotes all of its resources to the production of clocks, then it will produce… 16 clocks and 0 candles.
7. This economy has the ability to produce at which points?... A, B, C, F, G
8. If the resource is not fully utilized (e.g., unemployment), could this economy produce at which point(s)?... C, F, G
9. What is the opportunity cost of moving from
point A to point B?... 15 candles.
10. For this economy, as more and more clocks are produced, the opportunity cost of an additional clock produced (in terms of candles)… increases.
11. The movement from point B to point D could NOT be caused by… unemployment.
12. Which of the following events would explain the shift of the production possibilities frontier from A to B?... The economy experienced a technological advance in the production of books.
13. When a production possibilities frontier is bowed outward, the opportunity cost of producing an additional unit of a good… (not sure… will update when I know the answer!)
14. If the production possibilities frontier is bowed
outward, then "?" could be… (not sure, will update when I know the answer!)
15. Production possibilities frontiers are usually bowed outward. This is because… it reflects the fact that the opportunity cost of producing a good decreases as more and more of that good is produced.
16. Which of the following is an example of a positive, as opposed to normative, statement?... When the quantity of money grows rapidly, inflation is a predictable consequence.