CH 2 Model Building and Gains From Trade
CH 2 Model Building and Gains From Trade ECON 101
Long Beach State
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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: