ECO1104 B Sep. 19 , 2013
YUJIE YI #7038840
Assumptions and Models
Both of these groups have a MODEL in their minds about how the labour market functions
To be useful at all, the models have to omit a lot of detail, and thus they are generalized.
Any economic model good or bad, is based on unproven ASSUMPTIONS, from which
subsequent logical deductions are made.
They are designed to SIMPLIFY the model so that conjectures can be made.
Assumptions are usually unrealistic.
the Production Possibilities Frontier (PPF) is one first economic model,
Also called ATRANSFORMATION CURVE.
Assume that the economy produces two goods, “guns and butter”.
Ametaphor for social spending versus military spending during the Vietnam war
It represents all feasible combinations of production of the two goods.
On figure 2.2, the interpretation of point B: given 700 units of cars, 2000computers
is all that can be produced.
The frontier does no include the axes.
4 Major Points Regarding the PPF
Points inside are feasible, while points beyond the PPF are unattainable.
This illustrates the problem of SCARCITY
1 /4 Points inside represent a situation of under-utilised resources.
- Canadian economy is producing at perhaps 95% of capacity, but much lower
than that in the manufacturing sector
- Frontier represents the Capacity.
Points on the frontier are said to be productively efficient.
The PPF has a negative slope
Also due to the problem of scarcity
This reflects what we call a TRADE-OFF
- If we want more butter (guns), we have to give up some guns (butter)
- “Books not Bombs” – trade off military spending for education spending
- In Canada in 2013, it’s social spending (better) versus spending on security or
The tragic tale of Lyndon Baines Johnson (LBJ)
- Over-expanded the US economy in the late 1960’s
Learning tip for the entire course: please note the link between the geometric level
of analysis and the economic level of analysis
- Name of th