On this island, there are only two foods: pineapples and crabs. You are stranded on a tropical island alone. For this model, imagine the following scenario: Model of Production If you were stranded on an island with only pineapples and crabs, how much of each would you produce? Would this change depending on how difficult each one was to harvest? (Credit: Pablo Garcia Saldaña/Unsplash)Īn economic model is only useful when we understand its underlying assumptions. By understanding these models, we can develop a mindset to understand the economic world. Economic models are the building blocks of most modern economic theory. Holding some information constant can help us understand a concept without being overwhelmed by a vast number of influencing factors. While one should remain aware of this, these models are still useful. Oftentimes in introductory Microeconomics, these models seem oversimplified because they hold certain variables constant. How can we navigate such complex economic issues to make normative judgments? The answer is economic models.Īn economic model is a simplified framework that is designed to illustrate complex processes. Many of these examples are macro issues that will impact our micro analysis. The weather can impact the production of goods, and politics can create tension between countries. A country’s interest rate influences the flow of financial capital its exchange rate encourages or discourages the purchase of goods and services. Think of all the different variables that can impact trade. (Credit: DarrenRD/ Wikimedia Commons/ CC-BY-SA-4.0) Although there are many unpredictable aspects to our world, economics develops a simplified framework to make analysis despite these unknowns. The devastation severely impacted the economy of Alberta, not to mention the lives of many of its habitats. The fires in Fort McMurray were a natural disaster that could not have been anticipated. Explain how preferences influence our production decisions.Understand how to graph and analyze a PPF.Define opportunity cost and apply it to daily situations.Understand how economic models work to simplify complex problems.Changing production from one point on the PPF to another (say, switching from producing 20 bouquets and 10 wreaths to 10 bouquets and 20 wreaths) demonstrates the idea of tradeoffs and opportunity costs.By the end of this section, you will be able to: The line itself shows all of the most efficient options for production given limited resources. The PPF is important in economics because it covers a lot of basics. If the technology increases, or if the flower shop gets more flowers, that could shift the PPF to the right, increasing the output possibilities. Beyond the PPF, to the right and above, are production possibilities that aren’t possible right now.not enough inputs. Any production possibilities below the curve just aren’t efficient either there are flowers left unused, workers screwing around, or both. It shows all of the best options the flower shop has, assuming the flower shop wants to maximize profits. Maybe it will produce 15 wreaths and 2 bouquets. Maybe the shop will produce 10 wreaths and 20 bouquets. All points on the plane represent different production possibilities. Bouquets are on the y-axis, and wreaths are on the x-axis. Say there’s a flower shop that sells two kinds of flower products: bouquets (for Valentine’s Day, Mother’s Day, etc.) and wreaths (for funerals). Also known as the production possibilities curve (PPC), the production possibilities frontier (PPF) is an economic graph showing the different possible combinations for producing two goods as efficiently as possible, given the available inputs.
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