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Economic Models
A model is a simple theoretical description that captures the
essentials of how the economy works.
Simple since it does not capture every detail.
Walter Nicholson
Amherst College
But lets you see the overall picture and answer the relevant
question.
Christopher Snyder
Dartmouth College
2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Ch. 1 4
The PPF
CHAPTER
Economic
Models
Amount
of food
per week
PPF
Amount of clothing
per week
2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
What is Economics?
The PPF
Amount
of food
per week
10
2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Ch. 1 5
Ch. 1 3
12
Amount of clothing
per week
2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Ch. 1 6
2/29/2016
Scarce resources
Scarcity involves opportunity costs
Increasing opportunity costs
Incentives matter
Inefficiency has real costs
Ch. 1 7
10
Amount
of food
per week
10
9.5
12
14
Amount of clothing
per week
2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Ch. 1 8
12
Amount of clothing
per week
2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Ch. 1 11
10
Ch. 1 10
2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
As you produce more and more of one good, its opportunity cost
in terms of the other good foregone increases.
To produce more and more clothing you would have to give up
increasing amounts of food.
The law of diminishing marginal returns.
12
Amount of clothing
per week
2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Ch. 1 9
2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Ch. 1 12
2/29/2016
10
9.5
4
2
12 13
Amount of clothing
per week
2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Ch. 1 13
2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Ch. 1 14
2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
10
12
Amount of
clothing per week
2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Ch. 1 17
Ch. 1 16
Ch. 1 15
2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Ch. 1 18
2/29/2016
Price
2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Ch. 1 19
2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Ch. 1 22
Do you see a problem with Adam Smiths model of price given our
discussion of the PPF?
2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Ch. 1 20
On the demand side, the amount that people are willing to pay
falls as they consume more.
Or, as the price falls, people are willing to buy more
Marshalls model shows how prices are simultaneously
determined by demand and supply.
2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Ch. 1 23
2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Ch. 1 21
Demand
Quantity
2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Ch. 1 24
2/29/2016
A Change in Demand
Supply
Supply
P**
P*
Demand
Quantity
2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Q* Q**
Ch. 1 25
2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Price
Supply
P**
P*
P*
Demand
QD=QS=Q*
Quantity
2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Q**
Ch. 1 26
On Market Equilibrium
Q*
2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Ch. 1 29
What would happen if the price was set above or below the
equilibrium price?
2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Ch. 1 28
A Change in Supply
Ch. 1 27
2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Ch. 1 30
2/29/2016
Positive-Normative Distinction
Ch. 1 34
Summary
The supply and demand model shows how prices are determined,
and how changes in demand and/or supply influence the price.
2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Ch. 1 35
2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Ch. 1 33