Micro Chapter 2 Exam 1

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Micro Chapter 2 Exam 1
2012-01-28 13:57:55
Trade Offs trade

Trade offs and trade
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  1. Models in economics
    • a model is a simplified representation of realities that is used to better understand real-life situations
    • ex: a model showing how much income people spend for purchasing g/s
    • C = a + By
    • "other things equal": this assumption means that all other relevant factors remain unchanged for simplicity
  2. The Production possibility frontier (PPF)
    • it 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
  3. Comparative vs. Absolute Advantage
    Comperative Advantage
    Lower opportunity cost to perform a task than the other person
  4. Absolute Advantage
    Lower production cost (or, higher productivity) to perform atask than the other person
  5. Comparative advantage matters
    mutual benefits from following comparative advantage
  6. Comparative Advantage and International trade
    • U.S PFF is relatively flat
    • it implies that U.S has a comperative advantage in pork production (US specializes in pork production)
    • Canadian PPF is relative steep
    • It implies that Canada has a comperative advantage in aircraft production
    • Canada specializes in aircraft production trade
    • BOTH countries gain fom specialization and trade: both enjoy more benefits than if they were self sufficient
  7. Circular Low Diagram
    Factor markets: determine income distribution among factors owners -wages, interests, rent

    • Real world complications
    • International trade
    • Transactions b/w fims
    • governement
    • financial markets
  8. Models
    • Description, and predicition: Positive economics
    • Its about facts, and describes how the economy actually works
    • Prescripiton: normative economics
    • Its about values, and prescribes how the economy should work
    • ex: gas prices are too high
    • A solution to normative economics
    • ex: if policy option A is more efficient than B for achievving the same goal, then A is better than B