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Microeconomics 201 ~ chapter 2

by: Roger D.

Microeconomics 201 ~ chapter 2 201

Marketplace > University of North Dakota > Microeconomics > 201 > Microeconomics 201 chapter 2
Roger D.
GPA 4.0

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About this Document

These are notes from chapter 2 via class and supplemented with info from class.
Principles of Microeconomics
Dr. Xiao Wang
Class Notes
University, Of, North, University of North Dakota, dakota, Econ
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This 4 page Class Notes was uploaded by Roger D. on Saturday September 10, 2016. The Class Notes belongs to 201 at University of North Dakota taught by Dr. Xiao Wang in Fall 2016. Since its upload, it has received 5 views. For similar materials see Principles of Microeconomics in Microeconomics at University of North Dakota.


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Date Created: 09/10/16
Chapter 2 ~ Economic Models 1. Almost all economics is based on models, “thought experiments” or simplified versions of reality, many of which use mathematical tools such as graphs. An important assumption in economic models is the other things equal assumption, which allows analysis of the effect of a change in one factor by holding all other relevant factors unchanged. 2. One important economic model is the production possibility frontier. It illustrates opportunity cost (showing how much less of one good can be produced if more of the other good is produced); efficiency (an economy is efficient in production if it produces on the production possibility frontier and efficient in allocation if it produces the mix of goods and services that people want to consume); and economic growth (an outward shift of the production possibility frontier). There are two basic sources of growth: (1) an increase in factors of production — resources such as land, labor, capital, and human capital, inputs that are not used up in production — (2) and improved technology. 3. Another important model is comparative advantage, which explains the source of gains from trade between individuals and countries. Everyone has a comparative advantage in something—some good or service in which that person has a lower opportunity cost than everyone else. But it is often confused with absolute advantage, an ability to produce a particular good or service better than anyone else. This confusion leads some to erroneously conclude that there are no gains from trade between people or countries. 4. In the simplest economies people barter—trade goods and services for one another—rather than trade them for money, as in a modern economy. The circular-flow diagram represents transactions within the economy as flows of goods, services, and money between households and firms. These transactions occur in markets for goods and services and factor markets, markets for factors of production—land, labor, physical capital, and human capital. It is useful in understanding how spending, production, employment, income, and growth are related in the economy. Ultimately, factor markets determine the economy’s income distribution, how an economy’s total income is allocated to the owners of the factors of production. 5. Economists use economic models for both positive economics, which describes how the economy works, and for normative economics, which prescribes how the economy should work. Positive economics often involves making forecasts. Economists can determine correct answers for positive questions but typically not for normative questions, which involve value judgments. The exceptions are when policies designed to achieve a certain objective can be clearly ranked in terms of efficiency.  Positives ~ describe  Normatives ~ prescribe, prescription, value judgement, “should” 6. There are two main reasons economists disagree. One, they may disagree about which simplifications to make in a model. Two, economists may disagree—like everyone else—about values. Correct Matches: ➜ a simplified representation of a real situation that is used to Model better understand real-life situations. in the development of a model, the assumption that all relevant ➜ factors except the one under study remain unchanged. Other things equal assumption ➜ a model that illustrates the trade-offs facing an economy that produces only two goods. It shows the maximum quantity of Production possibility one good that can be produced for any given quantity produced frontier of the other. ➜ the resources used to produce goods and services. Labor and Factors of capital are examples of factors. production ➜ the technical means for producing goods and services. Technology the advantage conferred on an individual or country in ➜ producing a good or service if the opportunity cost of Comparative advantage producing the good or service is lower for that individual or country than for other producers. ➜ the advantage conferred on an individual or country in an Absolute activity if the individual or country can do it better than others. A country with an absolute advantage can produce more output advantage per worker than other countries. ➜ the direct exchange of goods or services for other goods or Barter services without the use of money. a diagram that represents the transactions in an economy by ➜ two kinds of flows around a circle: flows of physical things Circular-flow such as goods or labor in one direction and flows of money to diagram pay for these physical things in the opposite direction. ➜ Household a person or a group of people that share their income. ➜ an organization that produces goods and services for sale. Firm ➜ Markets for markets in which firms sell goods and services that they goods and produce to households. services ➜ markets in which firms buy the resources they need to produce Factor marketsgoods and services. ➜ Income the way in which total income is divided among the owners of the various factors of production. distribution ➜ the branch of economic analysis that describes the way the Positive economy actually works. economics ➜ the branch of economic analysis that makes prescriptions about Normative economics the way the economy should work. ➜ Forecast a simple prediction of the future. Points awarded: 17 out of 17


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