Chapter 2. Economic Models

Link to syllabus

Skip ‘comparative advantage,’ pages 33-36, Figures 2-4 to 2-6.

We won’t cover circular flow diagrams, like Figure 2-7.

We won’t cover the appendix.

Figure 2-1 p. 28. Production Possibility Frontier

Definitions of PPF and Opportunity Costs

Production possibility frontier shows the maximum amount of onegood that can be produced for any given quantity of the other. (p. 28)

Opportunity cost of X in terms of Y: how much of Y that has to be given up in order to get another unit of X. (referenced on page 7).

Figure 2.2 p. 30. Increasing Opportunity Costs

Another example of opportunity costs

Data for a Production Possibility Curve

X 0 1 2 3 4 5Y 20 18 15 11 6 0

Opportunity cost of each new unit of X, in terms of # of Y 2 3 4 5 6

Figure 2.3 p. 29. Economic Growth

Description of the Theory of Comparative Advantage

• The theory says that free trade is the best policy• Countries can maximize their ‘consumption’ (availability

of goods and services), because…• They maximize their production, producing those things at

which they are most efficient (their comparative advantage), and

• Theory assumes full employment

• Theory ignores distribution of benefits inside the country – that’s another issue

Figure 2.4 p. 33. The Production Possibility Curves for Two Countries

These figures will not be covered in this course!

Figure 2.6 p. 38. Circular Flow Diagram

We will not use these graphs in this course.

Figure 7.1 p. 189 .Circular Flow (more complicated)

Circular flow diagrams will not be included in this course.