EC120 Lecture Notes - Lecture 2: Eurocopter Ec120 Colibri, Opportunity Cost, Root Mean Square
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In the rst, economics employ the scienti c method, the development of models and testing of theories about how the world works. Assumptions simplify the complex world, make it easier to understand. Model: a highly simpli ed representation of a more complicated reality. Circular-flow diagram: a visual model of the economy that shows how dollars ow through markets among households and rms. Ppf: a graph that shows the combinations of two goods the economy can possibly produce given the available resources and the available technology. Moving along a ppf involves shifting resources from the production of one good to another good. Society faces a tradeoff: getting more of one good requires sacri cing some of the other good. Slope of the ppf tells you the opportunity cost of one good in terms of the other. The ppf could be a straight line, or bow-shaped.