Econ Notes: Chapter 2 Assumption and Models- Assumptions simplify the complex world, make it easier to understand.- Ex. To study international trade, assume tow countries and two goods. Unrealistic, but simple to lean and give useful insights about the real world.- Used to explain things in the real word- Model: a highly simplified representation of a more complicated reality. (something we use to make something easy to explain)- Economists use models to study economic issuesThe Circular- Flow Diagram- The Circular Flow Diagram: a visual model of the economy, show how dollars flow through markets among households and firms.- 2 Types of “actors”o Household o Firms- Two marketso The market for “goods and services”o The market for “factors of production”Factors of Production- Factors of production: the resources the economy uses to produce goods and services, including o Laboro Land (water, metal) o Capital (buildings and machines used in production) (factories, technology, assembly lines)o Entrepreneurship (idea behind business or firm- Households:o Own the factors of production, sell/rent them to firm for incomeo But and consumes good and services- Firms:o Buy/hire factors of production, use them to produce good and serviceso Sell goods and services* see notes for circular flow * interest- payment over time The Production Possibilities Frontier- The Production Possibilities Frontier (PPF): a graph that shoes the combination of 2 goods the economy can possibly produce given the availableresources and the available technology- Recall: The opportunity cost of an item is what must be given up to obtain that item.- Moving along the PPF involves shifting resources (ex. Labor) from the production of one good to the other. - Society faces a trade off: Getting more of one good requires sacrificing some of the other.- The slope of the PFF tells you the opportunity cost of one good in terms of theotherThe Shape of the PFF- The PPF could be straight line, or bow-shaped- Depends on what happens to opportunity cost as economy shift resources from one industry to the other.o If OC remains constant, PPF is a straight line. Essentially, the same resources are equally useful for producing in either industry.o If OC is a god rises as the economy produces more of more good, PPF is bow-shaped. Essentially, the resources are specialized and not easilyadaptable for producing in either industry- The slope of a line equals the rise over the run, the amount the line rises when you move to the right by one unit. - With additional resources or improvement in technology, the economy can produce more computers, more wheat or any combination in between.o Economic growth shifts the PPF outward. - When Factors of Production are destroyed the PPF would shift inward.- Producing more bikes would require shifting some of the best brewers away from beer production, would cause a big drop in beer outputWhy the PPF Mightes be Bow Shaped- So, PPF is bow-shaped when different workers have different skills different OCs of production one good in terms of the other.- The PPF would also be bow-shaped when there is some other resource, or mix of resources with varying opportunity costs (EX different types of land suited for different uses)The PPF: Important Notes- The PPF shows all combination of two goods that an economy can possible produce, given its resources and technology.- The PPF illustrates the concepts of tradeoff and opportunity cost, efficiency and inefficiency, unemployment and economic growth Microeconomics and Macroeconomic- Microeconomics is the study of how households and firms make decisions and how they interact in markets- Macroeconomics is the study of economy-wide phenomena, including inflation, unemployment and economic growthThe Economist as Policy Advisor - As scientists, economist make positive statements, which attempts to describe the world as it.- As policy advisors, economists make normative statements, which attempts to prescribe how the world should be. (value judgment, describes world as it should be)Questions for the TestWhich of the following points on the curve are efficient? (Maxing out resources, FABA)Which point on the line is inefficient? D because they aren’t maximizing resourcesWhich point in unattainable? C because we don’t have enough recourses to reach it. If we move from A to B, what do we give up? 200 computers (or get 200 cars)If this was just a technical advance in computers, why did we get more cars? Its freesup resources so you can use them some where else, that could be used to produce