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ECO200Y5 (18)
Chapter 1

Textbook Chapter 1- Economic Models.docx

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Robert Barber

Textbook Chapter 1 Economic ModelsWhatisMacroeconomicsEconomics The study of the allocation of scarce resources among alternative uses The way resources get allocated is determined by the actions of many people who engage in a bewildering variety of economic activitiesMicroeconomics The study of the economic choices individuals and firms make and of how these choices create markets Models Simple theoretical descriptions that capture the essentials of how the economy works describes the basic features of markets AFewBasicPrinciplesMuch of microeconomics consists of simply applying a few basic principles to new situationsProduction Possibility Frontier A graph showing all possible combinations of goods that can be produced with a fixed amount of resources Also shows the opportunity cost of producing more of one good as the quantity of the other good that cannot then be produced Any combination on or inside the frontier can be produced but combinations outside the frontier cannot be made because there are not enough resources to do soSix principles1Resources are scarceoSome combinations of goods are impossible to make given the resources available cant have all of everything we want2Scarcity involves opportunity cost oOpportunity Cost The cost of a good as measured by the alternative uses that are foregone by producing itoProducing more of one good necessarily involves producing less of other3Opportunity costs are risingoExpanding the output of one particular good will usually involve increasing opportunity costs as diminishing returns set inoOpportunity cost of an economic action varies with the circumstances 4Incentives matteroOnly when the extra marginal benefits from an action exceed the extra marginal opportunity costs will people take the action being considered oPeople usually do not recognize the true opportunity costs of their actions and therefore take actions that are not the best from the perspective of the economy as a whole 5Inefficiency involves real costsoAn economy operating inside its production possibility frontier is performing inefficiently and such production would involve the loss
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