ECN 109 Lecture Notes - Lecture 2: Natural Experiment, Economic Model, Opportunity Cost
17 Oct 2017
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Document Summary
Scientific method: the dispassionate development and testing of theories on the workings of the universe. Since experiment is very difficult to conduct in economics, economists use historical events as natural experiment. Example : decrease in housing sales after interest rate hike. Assumption is used to simplify complexity of the world. We may assume there are only two goods. Unrealistic, but will give a valuable insight on consumption behaviour. Economic model is an explanation of workings of an economic phenomenon based on simplifying assumptions. Ppf (production possibilities frontier) is a graph that represents all the possible combinations of goods the economy can produce. We assume that there are two goods. Since the factors of production are limited in quantity, not every combination of goods is feasible. When the economy moves from one efficient point to other on the ppf , it faces a trade-off. The slope of the ppf, is opportunity cost of one good in terms of the other.
