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EC120 (348)
Chapter 2

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Rizwan Tahir

Thinking like an Economist The Economist as Scientist Economists play 2 roles 1. Social scientists: try to explain the world a. Economists employ the scientific method, the development of methods and testing theories about how the world works. 2. Policy advisors: try to improve it Assumptions & Models  assumptions are possible without models  Assumptions simplify the complex world, make it easier to understand o Ex. when studying international trade, we might assume the world consists of two countries and two goods. Very unrealistic, but simplifies the problem and yields useful insights about the more complicated real world  Economists use models to study economic issues. A model is a highly simplified representation of a more complicated reality The Production Possibilities Frontier and Our Second Model  A graph that shows the combinations of two goods the economy can possibly produce given the available factors of production and the available production technology  Any point inside the curve= insufficient and unemployed resources  Any point outside is unattainable The PPF and Opportunity Cost (OC)  Moving along a PPF involves shifting resources (e.g., labour) from the production of one good to the other.  Society faces a tradeoff: Getting more of one good requires sacrificing some of the other  The slope of the PPF tells you the opportunity cost of one good in terms of the other The Shape of the PPF  Can be a straight line or bow-shaped  Depends on what happens to oc as economy shifts resources from one industry to the other o If oc remains constant, the ppf is a straight line o If the
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