1、 2007 Thomson South-Western,all rights reservedN.G R E G O R Y M A N K I WPowerPoint Slidesby Ron Cronovich 2P R I N C I P L E S O FF O U R T H E D I T I O N1CHAPTER 2 THINKING LIKE AN ECONOMISTIn this chapter,look for the answers to these questions:What are economists two roles?How do they differ?W
2、hat are models?How do economists use models?What are the elements of the Circular-Flow Diagram?What concepts does this diagram illustrate?How is the Production Possibilities Frontier related to opportunity cost?What other concepts does it illustrate?What is the difference between microeconomics and
3、macroeconomics?Between positive and normative?2CHAPTER 2 THINKING LIKE AN ECONOMISTThe Economist as ScientistEconomists play two roles:Scientists:try to explain the worldPolicy advisors:try to improve itIn the first role,economists employ the scientific method:the dispassionate development and testi
4、ng of theories about how the world works.3CHAPTER 2 THINKING LIKE AN ECONOMISTAssumptions&ModelsAssumptions simplify the complex world,make it easier to understand.Example:When studying international trade,we might assume the world consists of two countries and two goods.Very unrealistic,but simplif
5、ies the problem and yields useful insights about the more complicated real world.Economists use models to study economic issues.A model is a highly simplified representation of a more complicated reality.4CHAPTER 2 THINKING LIKE AN ECONOMISTSome Familiar ModelsA road map5CHAPTER 2 THINKING LIKE AN E
6、CONOMISTSome Familiar ModelsA model of human anatomy from high school biology class6CHAPTER 2 THINKING LIKE AN ECONOMISTSome Familiar ModelsA model airplane7CHAPTER 2 THINKING LIKE AN ECONOMISTSome Familiar ModelsThe model teeth at the dentists officeDont forget to floss!8CHAPTER 2 THINKING LIKE AN
7、ECONOMISTOur First Model:The Circular-Flow DiagramThe Circular-Flow Diagram:A visual model of the economy,shows how dollars flow through markets among households and firms.Includes two types of“actors”:householdsfirms Includes two markets:the market for goods and services the market for“factors of p
8、roduction”9CHAPTER 2 THINKING LIKE AN ECONOMISTFactors of ProductionThe factors of production are the resources that the economy uses to produce goods&services.They include:labor land capital(buildings&machines used in production)10CHAPTER 2 THINKING LIKE AN ECONOMISTFIGURE 1:The Circular-Flow Diagr
9、amHouseholds:own the factors of production,sell/rent them to firms for income buy and consume goods&servicesHouseholdsFirms11CHAPTER 2 THINKING LIKE AN ECONOMISTFIGURE 1:The Circular-Flow DiagramHouseholdsFirmsFirms:buy/hire factors of production,use them to produce goods and services sell goods&ser
10、vices12CHAPTER 2 THINKING LIKE AN ECONOMISTFIGURE 1:The Circular-Flow DiagramMarkets for Factors of ProductionHouseholdsFirmsIncomeWages,rent,profitFactors of productionLabor,land,capitalSpendingG&S boughtG&S soldRevenueMarkets for Goods&Services13CHAPTER 2 THINKING LIKE AN ECONOMISTOur Second Model
11、:The Production Possibilities FrontierThe Production Possibilities Frontier(PPF):A graph that shows the combinations of two goods the economy can possibly produce given the available resources and the available technology.Example:Two goods:computers and wheatOne resource:labor(measured in hours)Econ
12、omy has 50,000 labor hours per month available for production.PPF ExampleProducing one computer requires 100 hours labor.Producing one ton of wheat requires 10 hours labor.5,00004,0001002,5002501,00040050,000040,00010,00025,00025,00010,00040,0000500050,000EDCBAWheatComputersWheatComputersProductionE
13、mployment of labor hours15CHAPTER 2 THINKING LIKE AN ECONOMISTPoint on graphProductionCom-putersWheatA5000B4001,000C2502,500D1004,000E05,000ABCDEPPF ExampleA.On the graph,find the point that represents(100 computers,3000 tons of wheat),label it F.Would it be possible for the economy to produce this
14、combination of the two goods?Why or why not?B.Next,find the point that represents(300 computers,3500 tons of wheat),label it G.Would it be possible for the economy to produce this combination of the two goods?1617Point F:100 computers,3000 tons wheatPoint F requires 40,000 hours of labor.Possible bu
15、t not efficient:could get more of either good w/o sacrificing any of the other.F18Point G:300 computers,3500 tons wheatPoint G requires 65,000 hours of labor.Not possible because economy only has 50,000 hours.G19CHAPTER 2 THINKING LIKE AN ECONOMISTThe PPF:What We Know So FarPoints on the PPF(like A
16、E)possibleefficient:all resources are fully utilizedPoints under the PPF(like F)possiblenot efficient:some resources underutilized(e.g.,workers unemployed,factories idle)Points above the PPF(like G)not possible20CHAPTER 2 THINKING LIKE AN ECONOMISTThe PPF and Opportunity CostRecall:The opportunity c
17、ost of an item is what must be given up to obtain that item.Moving along a PPF involves shifting resources(e.g.,labor)from the production of one good to the other.Society faces a tradeoff:Getting more of one good requires sacrificing some of the other.The slope of the PPF tells you the opportunity c
18、ost of one good in terms of the other.21CHAPTER 2 THINKING LIKE AN ECONOMISTThe PPF and Opportunity CostThe slope of a line equals the“rise over the run”the amount the line rises when you move to the right by one unit.1000100slope=10Here,the opportunity cost of a computer is 10 tons of wheat.22In wh
19、ich country is the opportunity cost of cloth lower?FRANCEENGLAND23England,because its PPF is not as steep as Frances.FRANCEENGLAND24CHAPTER 2 THINKING LIKE AN ECONOMISTEconomic Growth and the PPFWith additional resources or an improvement in technology,the economy can produce more computers,more whe
20、at,or any combination in between.Economic growth shifts the PPF outward.25CHAPTER 2 THINKING LIKE AN ECONOMISTThe Shape of the PPFThe PPF could be a straight line,or bow-shapedDepends on what happens to opportunity cost as economy shifts resources from one industry to the other.If opp.cost remains c
21、onstant,PPF is a straight line.(In the previous example,opp.cost of a computer was always 10 tons of wheat.)If opp.cost of a good rises as the economy produces more of the good,PPF is bow-shaped.26CHAPTER 2 THINKING LIKE AN ECONOMISTWhy the PPF Might Be Bow-ShapedMountain BikesBeerAs the economy shi
22、fts resources from beer to mountain bikes:PPF becomes steeperopp.cost of mountain bikes increases 27CHAPTER 2 THINKING LIKE AN ECONOMISTAWhy the PPF Might Be Bow-ShapedAt point A,most workers are producing beer,even those that are better suited to buildingmountain bikes.So,do not have to give up muc
23、h beer to get more bikes.Mountain BikesBeerAt A,opp.cost of mtn bikes is low.28CHAPTER 2 THINKING LIKE AN ECONOMISTBWhy the PPF Might Be Bow-ShapedAt B,most workers are producing bikes.The few left in beer are the best brewers.Producing more bikes would require shifting some of the best brewers away
24、 from beer production,would cause a big drop in beer output.Mountain BikesBeerAt B,opp.cost of mtn bikes is high.29CHAPTER 2 THINKING LIKE AN ECONOMISTWhy the PPF Might Be Bow-ShapedSo,PPF is bow-shaped when different workers have different skills,different opportunity costs of producing one good in
25、 terms of the other.The PPF would also be bow-shaped when there is some other resource,or mix of resources with varying opportunity costs.E.g.,different types of land suited for different uses30CHAPTER 2 THINKING LIKE AN ECONOMISTThe PPF:A SummaryThe PPF shows all combinations of two goods that an e
26、conomy can possibly produce,given its resources and technology.The PPF illustrates the concepts of tradeoff and opportunity cost,efficiency and inefficiency,unemployment,and economic growth.A bow-shaped PPF illustrates the concept of increasing opportunity cost.31CHAPTER 2 THINKING LIKE AN ECONOMIST
27、Microeconomics and MacroeconomicsMicroeconomics is the study of how households and firms make decisions and how they interact in markets.Macroeconomics is the study of economy-wide phenomena,including inflation,unemployment,and economic growth.These two branches of economics are closely intertwined,
28、yet distinct:they address different questions.32CHAPTER 2 THINKING LIKE AN ECONOMISTThe Economist as Policy AdvisorAs scientists,economists make positive statements,which attempt to describe the world as it is.As policy advisors,economists make normative statements,which attempt to prescribe how the
29、 world should be.Positive statements can be confirmed or refuted,normative statements cannot.Govt employs many economists for policy advice.E.g.,the U.S.President has a Council of Economic Advisors,which the author of this textbook recently chaired.Which of these statements are“positive”and which ar
30、e“normative”?How can you tell the difference?a.Prices rise when the government increases the quantity of money.b.The government should print less money.c.A tax cut is needed to stimulate the economy.d.An increase in the price of gasoline will cause an increase in consumer demand for video rentals.33
31、a.Prices rise when the government increases the quantity of money.Positive,describes a relationship,could use data to confirm or refute.b.The government should print less money.Normative,this is a value judgment,cannot be confirmed or refuted.34c.A tax cut is needed to stimulate the economy.Normativ
32、e,another value judgment.d.An increase in the price of gasoline will cause an increase in consumer demand for video rentals.Positive,describes a relationship.Note that a statement need not be true to be positive.3536CHAPTER 2 THINKING LIKE AN ECONOMISTWhy Economists DisagreeEconomists often give con
33、flicting policy advice.They sometimes disagree about the validity of alternative positive theories about the world.They may have different values and,therefore,different normative views about what policy should try to accomplish.Yet,there are many propositions about which most economists agree.37CHA
34、PTER 2 THINKING LIKE AN ECONOMISTPropositions about Which Most Economists Agree (and%agreeing)A ceiling on rents reduces the quantity and quality of housing available.(93%)Tariffs and import quotas usually reduce general economic welfare.(93%)A large federal budget deficit has an adverse effect on t
35、he economy.(83%)A minimum wage increases unemployment among young and unskilled workers.(79%)Effluent taxes and marketable pollution permits represent a better approach to pollution control than imposition of pollution ceilings.(78%)38CHAPTER 2 THINKING LIKE AN ECONOMISTFYI:Who Studies Economics?Ron
36、ald Reagan,President of the United States Barbara Boxer,U.S.Senator Sandra Day-OConnor,Supreme Court Justice Anthony Zinni,General,U.S.Marine Corps Kofi Annan,Secretary General,United Nations Meg Witman,Chief Executive Officer,eBay Steve Ballmer,Chief Executive Officer,Microsoft John Elway,NFL Quart
37、erback Tiger Woods,Golfer Ben Stein,Political Speechwriter,Actor,Game Show Host Arnold Schwarzenegger,Governor of California,Actor Mick Jagger,Singer for the Rolling Stones 39CHAPTER 2 THINKING LIKE AN ECONOMISTCHAPTER SUMMARYAs scientists,economists try to explain the world using models with approp
38、riate assumptions.Two simple models are the Circular-Flow Diagram and the Production Possibilities Frontier.Microeconomics studies the behavior of consumers and firms,and their interactions in markets.Macroeconomics studies the economy as a whole.As policy advisers,economists offer advice on how to improve the world.
