2) Opportunity Costs & Gains from Trade (ECON 1110)

positive statement

a statement that can be tested and validated; a statement about how things are; the real world

normative statement

a statement that expresses a value judgement about what is right or wrong and reflects subjective opinions that cannot be tested or validated (“should”)

ceteris paribus

a major assumption in economics that outside of variables that can change their values within the model, other factors remain fixed; “all other things being equal”

assumptions

useful for building economic models to dictate their limitations and indicate when models are applicable

exogenous variables

variables that have their values determined outside of the model; inputs into the model (x)

endogenous variables

variables that have their values determined within the model; can be values of intermediate factors or final outcomes in which we are interested (y)

natural resources (land)

physical land and the input naturally occurring in and on land

physical capital (capital)

tools, buildings, machines, and the like

human capital (labor)

quantity, knowledge, and skills of workers in the economy

production technology

tells us the resources that we would need to create a specific amount of a good or a service within a relevant period of time

production function

shows how much labor needed to create a specific quantity of an output

Production Possibilities Frontier (PPF)

a model that describes all the combinations of two outputs that the economy can produce if all of its resources are used efficiently

efficient

there are no changes that can be made that would give more of one output without having to r4educe the quantity of the other