Chapter 2

Why use an Economic model?

Economists use economic models to understand much more better. Economic models are the “skeleton” of Data, showing everything into a single model.

Positive/Normative statement

The example of this would be, saying a price of an item will drop, and also saying since the price will drop, firms should stop manufacturing this certain good.

-Positive Statement defines how the current world is.For example, stating the current market price for a certain item is a positive statement; it clearly states how much the price is.

-Normative Statement defines how the world should be in the person’s point of view

Microeconomics

Microeconomics is the study of economics in a more sophisticated, detailed picture; seeing how a number of household or firms manage their scarce resources.

To put it in another words, “when looking at the forest, looking at a each tree specifically is Microeconomics.”

Circular Flow

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Production Possibilities Frontier

Possibility Frontier is how firms use their given scarce resources, to their maximum efficiency.