ECO 105 1nd Edition Lecture 2Outline of Last Lecture I. What is economics?II. VocabularyIII. Economy/EconomiesIV. Microeconomics and MacroeconomicsV. Principles of Economicsa. Principle 1b. Principle 2c. Principle 3d. Principle 4e. Principle 5f. Principle 6g. Principle 7h. Principle 8Outline of Current LectureI. Introduction to economic modelsII. Model #1a. Storyb. Principlesc. Diagramd. Definition/Probleme. Real GDPf. Economic Growthg. Individual ChoiceCurrent LectureI. Introduction to economic modelsa. Modeli. Foundation of economic theory1. In economics: require a degree of abstraction to represent the realworldii. Simplified version of the real world intended to communicate some salient feature (concept/idea) of the worldThese notes represent a detailed interpretation of the professor’s lecture. GradeBuddy is best used as a supplement to your own notes, not as a substitute.b. Abstraction = the process of limiting the set of information around a concept/idea/phenomenon in order to develop a general understanding of the concepti. General = more universally applicablec. Ceteris paribus = an assumption of all economic modelsi. The signal of abstractionii. All else constantII. Production Possibilities Frontier (PPF)a. The text modifies the traditional PPF Story of Robinson Crosoe to fit more closely with modern culture. Utilizes the movie “Cast Away”i. Imagine a human stranded on an island. In order to survive, this individual must allocate his/her time to productive activity1. Two productive activities: gathering coconuts and catching fishb. Illustrates several principles we talked about last timei. Scarcity and efficiency1. Scarcity in terms of labor (L) resourceii. Trade-offs and opportunity costc. “Cast Away” PPFC = coconuts, F = fishi. Efficiency and resourcesii. Three sets of points in space1. On line = efficient production2. “Under” =inefficient3. “Above” = unattainableiii. Qualifier: by the statement “given the quantity of resources”d. PPF = all the combinations of C & F that the cast away can produce given his/her resources (time --> labor hours and efficient use of them)i. What is the opportunity cost of moving from point A to B?PPF (F,C) = function of fish and coconutsPPFA (20,15), PPFB (28,9)∆C/∆F = (CA-CB)/(FB-FA) = 6/8 = 3/4¾ of a coconut is given up for every 1 additional fish that is caught.ii. Opportunity cost along this line is constante. Real GDPReal GDP would be 15 & 20GDP = PCC+PFFf. Economic GrowthEconomic growth would only happen in this example ∆C/∆L goes up, ∆F/∆L also goes up (L is hours labored)g. Individual choice = requires a higher/greater degree of abstractioni. Indifference curve = represents all combinations of C and F between which the cast away is indifferent (makes the castaway equally well off)1. Indifference curves farther from the origin represent higher levels of