![]() Since there are only a certain number of hours in the day, time is a scarce resource. While this is an extreme example, it is reflective of a common problem in production. You are forced to make a decision on how to allocate the scarce resource of time. In other words, you face a trade-off: any time you spend harvesting pineapples is time that cannot be spent looking for crabs. ![]() 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.By the end of this section, you will be able to:
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