Chapter 2 - Lecture notes 2 PDF

Preview

Summary

Thorough lecture and textbook notes for the chapter. taught by Doyle, but book is by Coppick. ...

Description

Chapter 2: Model Building and Gains from Trade How do economists study the economy? Positive and Normative Analysis  Positive statement o Used to be as objective as possible o Can be tested and validated o Facts  Normative Statement o An opinion that cannot be tested or validated o Rather it describes what ought to be  Economists are concerned with positive analysis  Voters, philosophers, and policy makers are concerned with normative analysis Economic Models  Ceteris Paribus o Concept under which economists examine a change in one variable while holding everything else constant o Ex) when designing a plane, the wright brothers kept everything constant and just changed the angle of the wind and took measurements o In economics one example is looking at supply and demand  Endogenous versus Exogenous Factors o Models must account for both factors that we can and cannot control o Endogenous factors – variables that CAN be controlled o Exogenous factors – variables that CANNOT be controlled o Ex) plane design was in the Wright brothers control (Endogenous) o Ex) Wind and rain were things the Wright brothers could not control (Exogenous)  The Danger of Faulty Assumptions o Investors had the faulty assumption that real estate prices would only rise  Then from 2006 to 2008 the prices fell  This caused the entire financial market to crash What is a Productions Possibilities Frontier? 



Productions Possibilities Frontier o Model that illustrates the combinations of outputs that a society can produce if all of its resources are being used efficiently o A linear model means there is a constant trade off occurring between the two goods Productions Possibilities Frontier and Opportunity Cost o When resources are not perfectly adaptable production does NOT expand at a constant rate



 This creates an PPF that is bowed outward o Law of increasing relative cost  Opportunity cost of producing a good rises as a society produces more of it  To make more pizzas society has to use workers who are increasingly less skilled at making them  This is why when you move UP the PPF the cost of producing an extra 20 pizzas increases.  Ex) at the bottom, increasing 20 pizzas may only have an opportunity cost of 30 wings  However, at the top increasing by 20 more pizzas has an opportunity cost of 80 wings!  Refer to page 33, figure 2.2 if confused Productions Possibilities Frontier and Economic Growth o When a new technology or skill is introduced the PPF can shift outward  Sometimes it shifts our for JUST one of the goods  EX) a new assembly line makes it easier to produce pizzas  There is a growth in both pizza and wings however because the labor that is not used towards making pizzas goes towards the wings  However, at the point where 0 pizzas are produced there is no growth  Refer to Figure 2.3 page 35 o When the population grows and more people start making pizza and wings this can shift the entire PPF outward

What are the Benefits of Specialization and Trade?    

Gains from Trade Opportunity Cost From Trade Finding the Right Price to Facilitate trade Review in class or with Practice problems!

What is the Trade-Off between having more now and having more later?  Consumer Goods, Capital Goods, and Investment o Consumer goods – produced for present consumption o Capital goods – help produce other valuable goods and services in the future o Investment – process of using resources to create or buy new capital o When society invests in more capital goods and less consumer goods it promotes and expands growth significantly o This is the tradeoff between the present and the future o Larger developed countries don’t always operate at a level that allows significant growth because they have less to gain  Countries like India and China are sacrificing present for a better future and their growth trends are showing





While countries like the US don’t have to sacrifice the present so they have much more leisure time and disposable income which results in greater rates of consumption The economic growth rates in China and India are thus much higher than developed countries...