1.5.1 Production Possibilities Curve Flashcards
Economic models:
simplify economic reality
show how dependent variables are affected by independent variables
incorporate a variety of assumptions such as ceteris paribus (all other things being equal!)
Economists assume that economic decision-makers want to minimize their opportunity costs.
This means that…
Decision makers must keep in mind the opportunity cost of each alternative
The best decision is the one with the least costs!
PPC/PPF
Remember all Economic Models have assumptions that try to simplify the world
Ceteris Paribus (latin for everything else held constant)
Uncontrollable factors such as weather, natural disasters ect would skew real world results so we need to control for them. Thus we assume ceteris Paribus, meaning we assume the weather is constant.
The economy only makes two products
All resources are employed at their maximum capacity
PPC shows a range of
possible production combinations for an economy or decision maker.
You can choose to spend all your time on exercise (0,70) or all of your time on homework (56,0) or any mix between
The concave shape represents the law of
“increasing opportunity cost and diminishing marginal utility”
Economics refers to the additional benefit received from the next unit of a good as the
Marginal benefit
Economics refers to the additional benefit received from the next unit of a good as the Marginal benefit and the additional cost incurred from the next unit as the
marginal cost.
Economic Model Assumptions
Ceteris Paribus
Consumers are Rational and self interested
Consumers seek to maximise total benefit and avoid economic loss
Marginal analysis
is the Analysis of doing 1 more of something. You compare the marginal benefit derived against the marginal cost incurred, if benefits outweigh the costs, keep going!
What is a CBA (Cost Benefit Analysis)
Our second decision making model is a tool we use to answer yes/no or start/stop questions or to compare 2 or more options.
A CBA compares the total economic costs and benefits to determine if what the best option is.
Remember to include both monetary and non monetary costs and benefits. Assign them all a value in monetary terms
Some Challenges with CBA
Values must be identified in a consistent scale. In economics we always use money
Assigning values can be difficult, especially for non monetary items like happiness
Bias can show up in the assigning of values
