C2 Economic Models: Trade-offs and Trade
Summry: 1.Almost all economics is based on models. An important assumption in economic models is the other things equal assumption, which allows analysis of the effect of a change in one factor by holding all other relevant factors unchanged.2.One important economic model is the production possibility frontier. It illustrates: opportunity cost, efficiency, and economic growth. There are two basic sources of growth: an increase in factors of production, resources such as land, labor, capital, and human capital, inputs that are not used up in production, and improved technology. 3. Another important model is comparative advantage, which explains the source of gains from trade between individuals and countries. Everyone has a comparative advantage in something. This is often confused with absolute advantage, an ability to produce a particular good or service better than anyone else. 4.In the simplest economies, people barter or trade goods and services for one another—rather than trade them for money, as in a modern economy. The circular-flow diagram represents transactions within the economy as flows of goods, services, and money between households and firms. These transactions occur in markets for goods and services and factor markets. 5. Economists use economic models both for positive economics, which describes how the economy works, and for normative economics, which prescribes how the economy should work. Positive economics often involves making forecasts. Economists can determine correct answers for positive questions, but typically not for normative questions, which involve value judgments. 6.There are two main reasons economists disagree. One, they may disagree about which simplifications to make in a model. Two, economists may disagree—like everyone else—about values. C3. Supply and Demand
Summry: 1.The supply and demand model illustrates how a competitive market works.2.The demand schedule shows the quantity...
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