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WEEK 2: Model Building and Gains from Trade - Coggle Diagram
WEEK 2: Model Building and Gains from Trade
The Scientific Method
Positive
Analysis
testable
Can use scientific or empirical data to verify if something if true
Normative
Statement Analysis
Opinion
Modelling
Change one variable at a time, holding other things constant
ceteris paribus
Influencing Factors
Endogenous
factors
Built into the model
controllable
Exogenous
factors
Factors you don’t control but still affect the model/outcomes
Characteristics of a good economic model
Simple to understand
Flexible
in design
Able to make
powerful predictions
Law of Increasing Relative Cost (Opportunity Cost)
Increase the quantity of one product at the expense of another to attain
maximal quantity
Production Possibilities Frontier (PPF)
Combinations of
outputs
that a society can
produce
if all of its
resources
are being used
efficiently
.
Advantages
Comparative Advantage
What you do best (lower opportunity cost)
Lower opportunity cost
Absolute Advantage
Achieved when one is able to produce a
competitive product
using
fewer resources
, or the same resources in less time.