Microeconomics: Difference between revisions
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===Production Possibilities Curves=== | ===Production Possibilities Curves=== | ||
The production possibility curve is a hypothetical representation of the amount of two different goods that can be obtained by shifting resources from the production of one good to the production of the other. The curve is used to represent a society’s choice between two different goods. A society can use up all its potential resources producing a lot of butter and no guns at all. Or can use most of its resources producing guns and no butter. Between those to extremes there are infinite combinations of possibilities for production of guns and butter that can be choosed by society. <ref name=PRODUCPOSSIB>[http://krypton.mnsu.edu/~renner/ppc.htm Production Possibility Curves]</ref><small>See graphs at the links</small> | The production possibility curve is a hypothetical representation of the amount of two different goods that can be obtained by shifting resources from the production of one good to the production of the other. It is "strictly hypothetical" and "static" in nature. The curve is used to represent a society’s choice between two different goods. A society can use up all its potential resources producing a lot of butter and no guns at all. Or can use most of its resources producing guns and no butter. Between those to extremes there are infinite combinations of possibilities for production of guns and butter that can be choosed by society. <ref name=PRODUCPOSSIB>[http://krypton.mnsu.edu/~renner/ppc.htm Production Possibility Curves]</ref><small>See graphs at the links</small> | ||
Any two different goods could be chosen arbitrarily. This is one of the "assumptions" for this economic model. The curve, (plotted on a X-Y axis) shows graphically, during a specific period of time (another assumption), which combined quantities of both goods could be produced, "if all resources are fully employed" (another assumption), while "technology and institutions do not change" (yet another assumption). Given those "hypotetical" conditions, society's "output potential" for those two goods combined is realized anywhere on the curve (which is called the "production possibility curve’s frontier"). Any point on the "production curve" represents the maximum output possible for both commodities. (mathematically all points in the curve represent the "locus" of the maximum possible combination of output for both goods simultaneoulsy). <ref name=PRODUCPOSSIB>[http://krypton.mnsu.edu/~renner/ppc.htm Production Possibility Curves]</ref><small>See graphs at the links</small> | Any two different goods could be chosen arbitrarily. This is one of the "assumptions" for this economic model. The curve, (plotted on a X-Y axis) shows graphically, during a specific period of time (another assumption), which combined quantities of both goods could be produced, "if all resources are fully employed" (another assumption), while "technology and institutions do not change" (yet another assumption). Given those "hypotetical" conditions, society's "output potential" for those two goods combined is realized anywhere on the curve (which is called the "production possibility curve’s frontier"). Any point on the "production curve" represents the maximum output possible for both commodities. (mathematically all points in the curve represent the "locus" of the maximum possible combination of output for both goods simultaneoulsy). <ref name=PRODUCPOSSIB>[http://krypton.mnsu.edu/~renner/ppc.htm Production Possibility Curves]</ref><small>See graphs at the links</small> | ||
Revision as of 13:25, 1 April 2007
- <This article is under construction>
Microeconomics is the branch of Economics that studies the behavior of units called "economic agents". Microeconomic models investigate assumptions about "economic agents" activities and about interactions between these agents. An "economic agent" is the basic unit operating in the model. Most often, we do have in mind that the "economic agent" is an individual, a person with one head, one heart, two eyes, and two ears. However, in some economic models, an economic agent is taken to be a nation, a family, or a parliament. At other times, the "individual" is broken down into a collection of economic agents, each operating in distinct circumstances and each regarded as an economic agent. When we construct a model with a particular economic scenario in mind, we might have some "degree of freedom" regarding whom we take to be the "economic agents". [1]
Those economic models are instruments or "tools" which help economists better understand the economic reality. As reality is too complex, and has infinite variables - that cannot be analysed simultaneoulsy - those models make simplifying assumptions about real life. We could compare economic models to geographical maps: the models create a "map" of the economic reality the same way a map creates a conventional representation of a country. As with maps, no information will come out of an economic model unless it had been previously incorporated in the model by the researcher; this information will only be presented in a more comprehensive manner. It is important to fully understand all the "assumptions" which lie behind any economic model in order to rationally understand their results.
The basic models of microeconomics
Production Possibilities Curves
The production possibility curve is a hypothetical representation of the amount of two different goods that can be obtained by shifting resources from the production of one good to the production of the other. It is "strictly hypothetical" and "static" in nature. The curve is used to represent a society’s choice between two different goods. A society can use up all its potential resources producing a lot of butter and no guns at all. Or can use most of its resources producing guns and no butter. Between those to extremes there are infinite combinations of possibilities for production of guns and butter that can be choosed by society. [2]See graphs at the links
Any two different goods could be chosen arbitrarily. This is one of the "assumptions" for this economic model. The curve, (plotted on a X-Y axis) shows graphically, during a specific period of time (another assumption), which combined quantities of both goods could be produced, "if all resources are fully employed" (another assumption), while "technology and institutions do not change" (yet another assumption). Given those "hypotetical" conditions, society's "output potential" for those two goods combined is realized anywhere on the curve (which is called the "production possibility curve’s frontier"). Any point on the "production curve" represents the maximum output possible for both commodities. (mathematically all points in the curve represent the "locus" of the maximum possible combination of output for both goods simultaneoulsy). [2]See graphs at the links
Any "unemployed" resources by society, such as labor, capital, or physical resources would cause society to remain in an "inefficient production level". This would be shown in the graph as a point to the left, (or inside) the curve. (So, when some people are unable to find a job, society is not reaching its "most efficient level of production" and the whole of society pays a price for that unemployment). By definition all point to the right (or outside) of the production possibility curve (frontier) are impossible to be attained, given the limits of existing resources and technology (another assumprion).
Assumptions used for the construction of this economic model
- Any two different goods could be chosen arbitrarily;
- Production takes place during a specific period of time;
- All resources are fully employed;
- Technology and institutions do not change, and
- All points to the right (or outside) of the "production possibility curve" (frontier) are impossible to be attained.
We will never find all of those conditions in real life. However they represent a "reasonable scenario" which allows economists to reduce the number of variables in the problem and better analyse the phenemenon.