ECON 102 1st Edition Lecture 3 Outline of Last Lecture Principles of Individual Choice Cont a Principles of Interaction b Principles that underlie economy wide interactions Outline of Current Lecture 1 Models Simplified Representations of Reality Crucial Role in Economics 2 Two Simple but important models a Production possibility frontier b Circular flow diagram will show next lecture Current Lecture Model A simplified representation of a real situation that is used to better understand real life situations o How Creating a real but simplified economy Ex Cigarettes in WWII prison camps Stimulating an economy on a computer Ex Tax models money models Simple Assets Stocks and Bonds Complex Assets Mortgage backed Securities MBS o MBS An asset that entitles its owner to a stream of earnings based on the payments made by thousands of people on their home loans Production Possibility Frontier o Illustrates the trade offs facing an economy that produces only two goods o Shows the maximum quantity of one good that can be produced for any given production of the other good o Linear Production Possibility Frontier Constant Cost o Feasible Anything shaded on or below the line is feasible production of goods o IDEALLY you would want to have a point on the line not underneath or over it Non Linear Production Possibility Frontier Not Constant o Economic Growth Outward Shift The economy can now produce more Gains from Trade illustrate using trade models o Assumptions 2 x 2 model 2 open economies Brazil US o US Large Open Economy o Brazil Small Open Economy 2 goods large small planes Constant Opportunity Costs Linear PPF These 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 o Trade makes it possible for Countries to move away from their PPF Without Trade Countries stay on PPF o Opportunity Cost of X in terms of Y Change in Y Change in X These 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
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