ECON 102 1st Edition Lecture 4 Outline of Last Lecture I Models Simplified Representations of Reality Crucial Role in Economics II Two Simple but important models a Production possibility frontier b Circular flow diagram will show next lecture Outline of Current Lecture 1 Comparative Advantage Vs Absolute Advantage 2 Two Simple but important models Cont a Circular flow diagram 3 Differences between Positive and Negative Economics Current Lecture Misunderstanding Comparative Advantage o A common mistake is to confuse comparative advantage with absolute advantage o Global Comparison Poor countries have relatively large clothing industries while rich countries have relatively small ones Poor countries have low productivity in the clothing sector but the sector has higher comparative advantage because their productivity in nonclothing sectors is even lower 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 Bartering When people directly exchange goods or services they have for goods or services they want The Circular Flow Diagram o This model represents the transactions in an economy by flows around a circle Household A person or a group of people that share their income Firm An organization that produces goods and services for sale Ultimately factor markets determine the economy s income distribution Using Models o Positive Economics The branch of economic analysis that describes the way the economy actually works o Normative Economics This branch makes prescriptions about the way the economy should work o Forecast This is a simple prediction of the future 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 prescription can be clearly ranked in terms of efficiency It is important to understand that economists don t use complex models to show how clever they are but rather because they are not clever enough to analyze the real world as it is When and Why Economists Disagree 1 Which Simplifications to make into a model 2 Differing Values a Equity Vs Efficiency
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