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Understanding Economic Models: Simplified Insights for Real-world Analysis

Learn about economic models, their purposes, and the Production Possibilities Curve to make rational choices based on marginal benefit and cost analysis. Dive into the world of economic theory and decision-making.

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Understanding Economic Models: Simplified Insights for Real-world Analysis

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  1. By: Ben Quick Economic Models

  2. What is an economic Model? • A simplified representation of the real world.

  3. Purpose of Models • Creating – a model is good if it provides useful material for analyzing the way the real world works. • Testing – testing is done by using a hypothesis, educated guess, or prediction.

  4. Production Possibilities • All the combinations of goods and serves that can be produced from a fixed amount of resources in a given period of time.

  5. Production Possibilities Curve

  6. Production Possibility Curve • The Production Possibility Curve is a graph that depicts the opportunity cost between any two items produced. It shows the maximum obtainable amount of one commodity for any given amount of another commodity.

  7. Making a Rational Choice – marginal benefit v/s marginal cost Marginal Benefit is the change in total benefit resulting from an action. Marginal Cost is the change in total cost resulting from an action. As long as the marginal benefit benefit of an activity exceeds the marginal cost, people are better off doing more of it; when the marginal cost exceeds the marginal benefit, people are better off doing less of it.

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