ECON 101 Chapter Notes - Chapter 2: Income Distribution, Absolute Advantage, Opportunity Cost

• School: U of M
• Department: Economics
• Course: ECON 101
• Professor: Ronald C Caldwell

Document Summary

8:14 pm model: a simplified representation of a real situation that is used to better understand real-life situations. Models are important because the simplicity allows economists to focus on the effects of only one change at a time. They allow us to hold everything else constant and study how one change affects the overall economic outcome. Other things equal assumption: all other relevant factors remain unchanged. The most effective form of economic modeling is the construction of thought experiments: simplified, hypothetical versions of real-life situations important economic models: The production possibility frontier: a model that helps economists think about the trade-offs every economy faces. Comparative advantage: a model that clarifies the principle of gains from trade trade both between individuals and between countries. Circular flow diagram: a schematic representation that helps us understand how flows of money, goods, and services are channeled through the economy.