MGEA01H3 Lecture Notes - Lecture 2: Absolute Advantage, Barter, Opportunity Cost

• School: UTSC
• Department: Economics for Management Studies
• Course: MGEA01H3
• Professor: Michael H O

Document Summary

Mgea01 chapter 2 economic models: trade-offs and trade. Models (simplified representations of reality) play a crucial role in economics: two simple but important models: Production possibility frontier circular-flow diagram: the difference between positive economics and normative economics, when economists agree and why they sometimes disagree. Model: simplified representation of a real situation that is used to better understand real-life situations. Creating a real but simplified economy: example: cigarettes in world war ii prison camps. Simulating an economy on a computer: examples: tax models, money models . Importance of models: their simplicity allows economists to focus on the effects of only one change at a time. Other things equal (ceteris paribus): means that all other relevant factors remain unchanged. The production possibility frontier illustrates the trade-offs facing an economy that produces two goods. It shows the maximum quantity of one good that can be produced given the quantity of the other good produced.