A fallacy

is an assumption that has been proven false but it is still accepteWhy do economists use models and graphs?d by many people because it appears to be true

Why do economists use models and graphs?

• To simplify and explain complex patterns, relationships and behaviors

• To outline and highlight the elements at work in an economic system 

• Identify general trends and tendencies to support forecasts and predictions 

The fallacy of composition: 

A mistaken belief that what is good for an individual is automatically good for everyone or what is good for everyone is good for the individual 

The post hoc fallacy: 

A mistaken belief that what occurs before some event is logically the cause of it, often it’s just coincidence (also known as the cause-and-effect fallacy) 

The fallacy of single causation: 

A mistaken belief based on oversimplification that a particular event has one cause rather than several causes

Inverse relationship: 

A negative association between two variables where one variable is increased the other decreases and when one variable decreased the other increased (change in opposite directions) 

Direct relationship: 

A positive association between two variables where when one variable is increased the other also increases and same for when one decreases, other decreases too

Opportunity Cost:

The value or benefit that must be given up to achieve something else (choosing to allocate resources to achieve one thing over another)

• Sum of all that is lost from taking one action over another 

Production Possibilities Curve: 

• A graphical representation of the production choices facing the economy 

• Illustrate the impact of scarcity

Economic Laws Affecting PP:

1. Only 2 products can be produced by this simple economy (easy to see trade off)

2. Assumes the economy has fixed technology and resources (only way to have more of one is to produce less of the other) 

3. The economy is at full employment (assumes that all productive resources are fully employed and are being used efficiently to produce max. output)

Relative cost:

• The cost of producing one item A expressed in terms of the numbers of another item, B which must be given up to produce A 

Trade off

The sacrifice of one resonance or precision choice for another

Consumer goods

Those goods or services that an economy produces to satisfy human needs

Capital goods

Goods, such as tools and machinery to produce consumer goods

The Law of increasing relative cost

The increase in the relative cost of producing more of item A, measured by the numbers of another item B that could be produced with the same resources

Frontier:

The curve on the PP graph representing the maximum number of two items that can be produced with a given amount of resources if all resources are productively employed (reality not possible for all to be fully employed)

• Goal is to reach frontier, human error, lack of labour force, etc cause the economy to perform under the level of max potential output 

Output: 

The products produced by using resources or inputs such as land, labour or capital 

Input:

A productive resource (land, labour, capital, etc) used to produce an output 

Law of diminishing returns:

The eventual decline to the rate of extra outputs produced that occurs when one input used in production of the output is held constant and the others are increased 

• States that outputs will increase if inputs increase but only to a point, after than point has been reached, inputs will no longer affect outputs positively 

• When at least one input is held constant, no matter how much other inputs are increased, there will be an eventual decline in the rate of extra output 

Law of increasing returns to scale: 

The increase in the rate of extra outputs produced when all inputs used in production are increased and no inputs are held constant 

• Steady increase in yield due to increase in all inputs