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CH 2 Model Building and Gains From Trade

by: Courtney Dycoco

CH 2 Model Building and Gains From Trade ECON 101

Marketplace > California State University Long Beach > Economcs > ECON 101 > CH 2 Model Building and Gains From Trade
Courtney Dycoco
Long Beach State
GPA 3.3
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ECON 101 Microeconomics
Class Notes
econ 101, Microeconomics, csulb




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This 4 page Class Notes was uploaded by Courtney Dycoco on Friday January 29, 2016. The Class Notes belongs to ECON 101 at California State University Long Beach taught by Lakpour in Spring 2016. Since its upload, it has received 18 views. For similar materials see Microeconomics in Economcs at California State University Long Beach.

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Date Created: 01/29/16
Scientific Method in Economics ­ Similar to “hard sciences” ­ construct a theory (or hypothesis ­ design experiements to test the theory ­ collect data ­ revise our theory based on evidence ­ Differences from “hard sciences” ­ economist’s lab is the world around us; firm and consumer  behavior studied ­ not always able to design experiments ­ historical data often used Positive and Normative analysis ­ positive statement  ­ a claim that can be tested to be true or false  ­ normative statement  ­ statement of opinion; cannot be tested to be true or false  ­ which is generally preferred? ­ positive; like to test claims with data Economic Models ­ Ceteris paribus ­ latin: “other things being equal” ­ assumption in which we examine a change in one variable, but  hold all other variables constant  ­ allows us to isolate the effect of a single variable Economic Analysis ­ endogenous factors ­ variables controlled for inside a model ­ independent variables we freely change in the model equations to  study their effect on the dependent variable ­ exogenous factors  ­ variables that are not accounted for in a model ­ outside our control Production Possibilities Frontier  ­ production possibilities frontier ­ combos of outputs that a society can produce if all of its resources are being used efficiently  ­ assumptions:  ­ technology fixed ­ resources fixed ­ simplified two­good analysis ­ Why is the PPF downward­sloping? ­ Must give up one good to increase production of another  ­ Why are we unable to produce certain combos? ­ Scarcity and limited resources ­ Efficient points ­ Points ON the PPF (A,B,C,D) ­ Inefficient points ­ Points inside the PPF (F) ­ Workers goofing off, unused buildings  ­ Unattainable (for now)  points ­ points outside the PPF (E) PPF and Opportunity Cost Nonlinear PPFs ­ We can draw a more realistic PPF by making it nonlinear and “bowed outward” ­ the PPF will not have a constant slope in this case ­ The slope will get steeper as we move from left to right, and opp  costs will not be constant ­ Law of increasing relative cost ­ refers to the increasing opp cost of production that occurs  as you move along the production ­ As we produce more of good A, we have to give up  increasingly larger amounts of good B QUESTIONS IN CLASS 3. Movement along the curve from point C to point A shows us the opp cost of producing more  bikes ­ FALSE  4. If we have high unemployment , then the curve shifts in ­ FALSE (curve doesn't shift!) 5. if an improved process for manufacturing cars is introduced then the entire curve will shift out­ FALSE  Shift in the PPF  ­ if the PPF were to expand outward, some previously unattainable good combos  would now be possible to produce  ­ the PPF COULD shift graphically in 2 ways  ­ new resources or technology could be introduced that either  ­ affect the production of ONE good or ­ Affect the production of BOTH goods Specialization and Trade ­ improvements in technology and more resources can make an economy more  productive ­ specialization and trade can also create gains for society  ­ Absolute advantage ­ one person can perform each task more effectively than the other  person  Terms of Trade ­ as long as the terms of trade are between the opp costs of the trading partners,  the trade benefits both sides Trade­off between Present and Future ­ consumer goods  ­ goods produced for current consumers ­ food, housing, clothing, entertainment  ­ capital goods  ­ goods that help produce other valuable goods ­ buildings, factories, roads, machinery, computers ­ investment ­ using resources to make new capital  Visualizing Investment  ­ Often, we are hesitant to invest in capital goods “today” even if it results in larger  consumer goods “tomorrow” ­ Today’s investment may ­ take a long time ­ have a large opp cost ­ May have uncertain results ­ Suppose that instead of producing pizza, we spent resources in order to  improve pizza­making technology. ­ Other examples of long-term investment → green energy, college QUESTIONS IN CLASS 1. with regard to the PPF an efficient point is a point that is on the curve  2. suppose there is high unemployment with respect to the PPF what will happen?  produce at a point inside PPF  3. What is the opp cost of producing capital goods instead of consumer goods? we  will give up consumption today CONCLUSION: 1. Economists use simplified models to understand how the economy works 2. The PPF illustrates the benefits of trade and allows us to describe ways to grow  the economy 3. When producers specialize, they focus their efforts on those goods and services  for which they have the lowest opp cost and trade with others who are good at making  something else  SUMMARY:


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