ECON 105 Lecture Notes - Lecture 2: Business Cycle, Graphical Model, Normative Economics
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Example: newton"s development of the theory of gravity after observing an apple falls from a tree. Assumptions simplify the complicated reality and make it easier to understand. Graphical model economists use diagrams and graphs to explain how economic variables are related and how participants in the economy interact with one another. Mathematical modela mathematical model is a formulation or equation that describes how economic variables are related. Verbal model a verbal model uses words to describe how economic variables are connected. Production possibilities frontier (ppf) = a graph that shows the combinations of output that an economy can possibly produce given the available factors of production and the available technology. Recall: the opportunity cost of an item is what must be given up to obtain that item. Moving along a ppf involves shifting resources (e. g. , labour) from the production of one good to the other. Society faces a tradeoff: getting more of one good requires sacrificing some of the other.