01:220:102 Lecture Notes - Lecture 2: Efficient-Market Hypothesis, Market Failure, Economic Surplus

• School: Rutgers University
• Department: Economic
• Course: 01:220:102
• Professor: Alexandre Hohmann

Document Summary

Model: simplificed representation of economic reality that allow us to understand a variety of economic issues. Possibly find or create a real but simplified economy. Stimulate workings of the economy on a computer. Tax models: large mathematical computer programs used to assess how the proposed changes in tax law would affect different types of people. Making (cid:498)thought experiments(cid:499): simplified, hypothetical versions of real-life situations. Other things equal assumption: all other relevant factors remain unchanged. Production point inside or on frontier: it is feasible. Production possibility frontier: model that illustrates the trade-offs facing an economy that produces only two goods; it shows the maximum quantity of one good that can be produced for any given quantity produced of the other. Comparative advantage: model that clarifies the principle of gains from trade between individuals and countries. Circular-flow diagram: schematic representation that helps us understand how flows of money, goods, and services are channeled through the economy.