CHAPTER 2 (2014)Apunte Inglés
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ECONOMICS. CHAPTER 2
ECONOMIC MODELS: TRADE-OFFS AND TRADE.
MODELS IN ECONOMICS.
A model is any simplified representation of reality that is used to better understanding real-life siuations.
! *Simplified representation of complex reality.
! ! -Try to find or create a real but simplified economy.
! ! -Simulate the workings of the economy on a computer.
Their simplicity allows economists to focus on the effects of only one change at a time -- The important assumption is that other things equal assumption (all other relevant factors remain unchanged).
MOST EFFECTIVE form of economic modeling are THOUGHT EXPERIMENTS: Simplified, hypotetical versions of real-life situations.
A good economic model can be a tremendous aid to understanding.
TRADE-OFFS: THE PRODUCTION POSSIBILITY FRONTIER.
Resources are scarce and, as a result, any economy faces trade-offs.
PRODUCTION POSSIBILITY FRONTIER: Improves our understanding of trade-offs by considering a simplified economy that produces only two goods. -- This simplification enables us to show the trade-off graphically.
By simplifying reality, the production possibility frontier helps us understand some aspects of the real economy better than we could without the model: *EFFICIENCY.
! An economy is efficient if there are no missed opportunities.
! -Efficient in production: The economy can no longer produce additional amount of a good without lowering ! the production level of another product.
! *Ability to produce a good using the fewest resources possible.
! ! -Efficient in allocation: Optimal distribution of goods and services taking into account consumer’s preferences.
EFFICIENCY = EFFICIENCY IN PRODUCTION + EFFICIENCY IN ALLOCATION An economy must produce as much of each good as it can given the production of other goods, and it must also produce the mix of goods that people want to consume.
! The true cost of any good isn’t the money it costs to buy, but what must be given up in order to get that ! good.
! ! The growing ability of the economy to produce goods and services -- Is one of the fundamental features of the real economy.
! *There are basically 2 sources of economic growth: ! ! -An increase in the economy’s factors of production (resources used to produce g&s).
! ! -A progress in technology.
ECONOMICS. CHAPTER 2 IN CONCLUSION, the production possibility frontier gives us our first clear sense of what constitutes economic efficiency, it illustrates the concept of opportunity cost, and it makes clear what economic growth is all about.
COMPARATIVE ADVANTAGE AND GAINS FROM TRADE.
COMPARATIVE ADVANTAGE: Models the gains from trading.
! -It makes sense to produce the things you’re especially good at producing and to buy from other people the ! things you’re not as good at producing.
TRANSACTIONS: THE CIRCULAR-FLOW DIAGRAM.
CIRCULAR-FLOW DIAGRAM: Represents the transactions ithat take place in an economy by two kinds of flows around a circle: flows of physical things such as goods, services, labor, or raw materials in one direction, and flows of money that pay for these physical things in the oppsite direction.