"Economic models are used to explain the way the world had worked in the past and predict how it will work in the future. A good model does both accurately." -Author Unknown
Economic models use a simplified version of reality to illustrate complex processes. Too much information while testing theories can be overwhelming - at least for me - so by cutting down the information to a few key components, it's easier to reach a conclusion. And by putting information into a model, it makes it possible to obtain consistent results.
For instance with the production possibilities frontier it's much easier to grasp the scope of possibilities when loking at two specific goods as opposed to trying to factor in several goods. The PPF model is a graph that shows a variety of combinations of output that the economy can possibly produce with the resources available at that time. This model makes it seem effortless to understand the concepts of efficiency, growth, opportunity costs and scarcity. It helps me to understand the economy by having an organized visual that lays out the different possibilities. By moving to a different point along the line, it illustrates opportunity cost - what was given up to produce x more units of something else. A point outside of the curve shows where production could be with growth, and inside the curve demonstrates inefficiency.
So with that I can boldly say, grasping economic concepts by use of the PPF = SUCCESS! :)
This chapter also talked about positive and normative analysis in the world of economics.
A ban on smoking in public places will reduce the tobacco industry's annual revenue. - Positive statement.
The government should ban smoking in public places. - Normative statement.
Positive analysis refer to descriptive, factual statements whereas normative analysis refers to prescriptive, value-based statements.
There's a big difference. ;)
That's all for now...
Ciao!
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