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What are economic models? How do they help?
Economic modeling is at the heart of economic theory.
Helps to logically isolate and sort out complicated chains of cause and effect and influence
Allows for experimentation, producing different scenarios, attempting to evaluate the effect of alternative policy options, or weighing the logical integrity of arguments.
Certain types of models are extremely useful for presenting visually the essence of economic arguments.
Here are some examples of economic models.
Production Possiblities Curve/Frontier
The Production Possibilities Curve (PPC) is a model used to show the tradeoffs associated with allocating resources between the production of two goods. The PPC can be used to illustrate the concepts of scarcity, opportunity cost, efficiency, inefficiency, economic growth, and contractions.
The Production Possibilities Curve (PPC) is a model that captures scarcity and the opportunity costs of choices when faced with the possibility of producing two goods or services. Points on the interior of the PPC are inefficient, points on the PPC are efficient, and points beyond the PPC are unattainable. The opportunity cost of moving from one efficient combination of production to another efficient combination of production is how much of one good is given up in order to get more of the other good.
The shape of the PPC also gives us information on the production technology (in other words, how the resources are combined to produce these goods). The bowed out shape of the PPC indicates that there are increasing opportunity costs of production.
Brain Teasers: 1. How would you show with a PPC that a country has constant opportunity costs of production?
2. Using a correctly labeled PPC model, show an economy that has increasing opportunity costs that can produce cattle prods and chocolate donuts that is underutilizing its labor.
Answers: Click Here
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