Chapter 2: Economic Models of Trade-Offs and Trade
Models in Economics: * Model: a simplified representation of a real situation that is used to better understand real-life situations * Other things equal assumption: all other relevant factors remain unchanged
Trade-offs and the Production Possibility Frontier: * Production Possibility Frontier: 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 quantity produced of the other (refer to graph on pg. 28) * Efficiency: ( pg. 29) * One key element is that there are no missed opportunities in production (there is no way to produce more of one good without producing less of other goods) * If the economy as a whole could not produce more of any one good without producing less of something else (if it’s on the production possibility frontier) it is efficient in production * On the other hand, if the economy could produce more of some things without producing less of others (typically means it could produce more of everything) it is inefficient in production * Ex. An economy in which large numbers of workers are involuntarily unemployed is inefficient in production * Efficiency also requires that the economy allocate its resources so that consumers are as well off as possible (efficient in allocation) * Opportunity Cost: (pg. 30) * The production possibility frontier is a reminder that the fundamental point that 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 production possibility frontier model can also be used to examine situations in which opportunity costs change as the mix of output changes * When only a small amount of a good is produced, the opportunity cost of producing