Professional Documents
Culture Documents
Spring 2001
Introduction slide 1
Introduction
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Introduction
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Introduction
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MICROECONOMIC AGENTS
Firms
Produce and sell goods and services Buy inputs (labor, capital & raw materials)
Consumers
Buy goods and services Sell inputs (labor services, loanable funds)
Introduction
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Introduction
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Introduction
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Contents of models
List of variables, especially a clear statement of what is to be explained Dependent v. independent variables
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A model of heights
height
a
H = a + b(A) b = H/A
age in years
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age in years
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A better model?
Height = f(age, gender, parents heights, nutrition, ...)
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women
age
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MODEL SUMMARY
Three ways to describe models
Graphs Tables of values Mathematical functions (equations)
Important concepts
Dependent and independent variables Linear function, intercept and slope
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PPF DEFINED
The Production Possibility Curve (or frontier) shows the maximum amount of a good you can produce given the amounts of other goods produced, and given the total amounts of inputs available, and given the technology of production.
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PPC EXAMPLE
Assumptions: There are only two goods, pizza and spaghetti. There are limited inputs and given technology of production. Definition: The PPC shows the maximum amount of pizza you can produce, given the amount of spaghetti to be produced.
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PRODUCTION POSSIBILITY CURVE SPAGHETTI 400 Which points are attainable and which points are unattainable? 300 200 100 0 0 10 20 30 40 50 60
PIZZA
Introduction
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PRODUCTION POSSIBILITY CURVE SPAGHETTI Whats the effect of an improvement 400 in the technology for producing spaghetti? 300 200 100 0 0 10 20 30 40 50 60
PIZZA
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PRODUCTION POSSIBILITY CURVE SPAGHETTI Whats the effect of an increase in 400 total resources (inputs)? 300 200 100 0 0 10 20 30 40 50 60
PIZZA
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Points inside the PPC are inefficient. For any point inside there corresponds some point that represents more production of both goods. Note that while points on the PPC are efficient, we cannot say at this time whether some are better for society than others.
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PIZZA
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Not only does more pizza mean less spaghetti, but each additional pizza costs more than the one before it.
This idea shows up as the PPC being concave to the origin. (The curve bows out.)
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PIZZA
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We will use Production Possibilities Curves that are straight lines (i.e., that have constant opportunity cost) to illustrate some important economic principles.
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