# MSU EC 201 - Chap2 (24 pages)

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# Chap2

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## Chap2

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Pages:
24
School:
Michigan State University
Course:
Ec 201 - Introduction to Microeconomics
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Krugman and Wells Chapter 2 Steven J Haider EC201 Spring 2015 Models Models are simplified representations of reality They can help us focus on important parts of a problem A model useful for one purpose may not be useful for another Example a map The map would be useless if it were not simplified This map is good for getting to Kalamazoo but bad for getting to Stockbridge p2 Models Economic models tend to be mathematical We can make precise statements about the model We can use models to help us think about real life situations Key word is can it depends on whether the model includes the important pieces Models can help us focus on one piece of a problem at a time all else equal or ceteris paribus Two common pitfalls to using economic models Mistaking the model for reality the model may not apply Dismissing all models as being wrong of course the assumptions are wrong but that doesn t mean the model is useless p3 Production Possibility Frontier PPF Our first model Set up Boeing can produce Dreamliners and smaller jets each year Some example production levels PPF provides the trade off p4 Production Possibility Frontier PPF Concepts Feasible vs infeasible quantities Efficiency Technology Opportunity cost See next slide p5 Opportunity cost Opportunity cost what must be given up for something else Consider moving from A to B A 15 DL 20 SJ B 9 DL 28 SJ Thus to move from A to B one gives up 6 DL for 8 SJ From A to B the opportunity cost for 8 SJ is 6 DL p6 Opportunity cost We often talk about OC in terms of 1 unit A 15 DL 20 SJ B 9 DL 28 SJ Or 6 DL 8 SJ 1 SJ 6 8 or 3 4 DL 1 DL 8 6 or 4 3 SJ Between A B The OC of 1 SJ is 3 4 DL from A to B The OC of 1 DL is 4 3 SJ from B to A p7 Opportunity cost From B to A 6 DL 8 SJ 1 DL 8 6 or 4 3 SJ From A to 0 30 15 DL 20 SJ 1 DL 20 15 or 4 3 SJ From 40 0 to B 9 DL 12 SJ 1 DL 12 9 or 4 3 SJ OC for 1 DL is always the same p8 Why is OC constant PPF is a straight line OC is just the slope Y X negative The slope is constant Generally we

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