Lectures_micro / Microeconomics_presentation_Chapter_2
.pdf
chapter:
2
>>Economic Models: Trade-offs and Trade
Krugman/Wells
Economics
©2009 Worth Publishers
WHAT YOU WILL LEARN IN THIS CHAPTER
Why models? Simplified representations of reality— play a crucial role in economics
Two simple but important models:
production possibility frontier
circular-flow diagram
The difference between positive economics and normative economics
When economists agree and why they sometimes disagree
Models in Economics
A model is a simplified representation of a real situation that is used to better understand real-life situations.
The “other things equal” assumption means that all other relevant factors remain unchanged.
Trade-offs: The Production Possibility Frontier
The production possibility frontier (PPF) illustrates the trade-offs facing an economy that produces only two goods. It shows the maximum quantity of one good that can be produced for any given production of the other.
The PPF improves our understanding of trade-offs by considering a simplified economy that produces only two goods by showing this trade-off graphically.
The
Quantity of
Feasible and |
Not feasible |
|
e |
||
|
||
in |
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|
Feasible but |
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|
not e cient |
|
|
|
PPF |
0
Quantity of "sh
Quantity of coconuts
Producing the |
…requires giving up |
20 " . . |
5 coconuts |
But producing
20 more "sh . . .
20
…requires giving up
10
0
Quantity of "sh
Quantity of coconuts
35
20
Production is initially at point |
|
A |
and 25 coconuts), |
it |
move to point E (25 |
fish and 30 coconuts).
0 |
30 |
50 |
Quantity of "sh
Production |
Castaways |
|
s Production |
Quantity of coconuts
30 |
Tom’s consumption |
without trade |
Tom s |
PPF |
0
Quantity of "sh
for Two Castaways
(a) Hank’s Production Possibilities
Quantity of coconuts
20
Hank’s consumption without trade
PPF
0 |
10 |
Quantity of "sh
Tom and Hank’s Opportunity Costs
Tom’s |
Hank’s |
Opportunity |
Opportunity |
Cost |
Cost |
|
|
One fish 3/4 coconut 2 coconuts
One |
4/3 fish |
1/2 fish |
coconut |