1、 2009 South-Western,a part of Cengage Learning,all rights reservedC H A P T E REconomicsPremium PowerPoint Slides by Ron Cronovich2What are economists two roles?How do they differ?What are models?How do economists use them?What are the elements of the Circular-Flow Diagram?What concepts does the dia
2、gram illustrate?How is the Production Possibilities Frontier related to opportunity cost?What other concepts does it illustrate?What is the difference between microeconomics and macroeconomics?Between positive and normative?1THINKING LIKE AN ECONOMIST2The Economist as ScientistEconomists play two ro
3、les:1.Scientists:try to explain the world2.Policy advisors:try to improve itIn the first,economists employ the scientific method,the dispassionate development and testing of theories about how the world works.THINKING LIKE AN ECONOMIST3Assumptions&ModelsAssumptions simplify the complex world,make it
4、 easier to understand.Example:To study international trade,assume two countries and two goods.Unrealistic,but simple to learn and gives useful insights about the real world.Model:a highly simplified representation of a more complicated reality.Economists use models to study economic issues.THINKING
5、LIKE AN ECONOMIST4Some Familiar ModelsA road mapTHINKING LIKE AN ECONOMIST5Some Familiar ModelsA model of human anatomy from high school biology classTHINKING LIKE AN ECONOMIST6Some Familiar ModelsA model airplaneTHINKING LIKE AN ECONOMIST7Some Familiar ModelsThe model teeth at the dentists officeDo
6、nt forget to floss!THINKING LIKE AN ECONOMIST8Our First Model:The Circular-Flow DiagramThe Circular-Flow Diagram:a visual model of the economy,shows how dollars flow through markets among households and firmsTwo types of“actors”:householdsfirms Two markets:the market for goods and services the marke
7、t for“factors of production”THINKING LIKE AN ECONOMIST9Factors of ProductionFactors of production:the resources the economy uses to produce goods&services,includinglabor land capital(buildings&machines used in production)THINKING LIKE AN ECONOMIST10FIGURE 1:The Circular-Flow DiagramHouseholds:Own th
8、e factors of production,sell/rent them to firms for income Buy and consume goods&servicesHouseholdsFirmsFirms:Buy/hire factors of production,use them to produce goods and services Sell goods&servicesTHINKING LIKE AN ECONOMIST11FIGURE 1:The Circular-Flow DiagramMarkets for Factors of ProductionHouseh
9、oldsFirms IncomeWages,rent,profitFactors of productionLabor,land,capital SpendingG&S boughtG&S soldRevenueMarkets for Goods&ServicesTHINKING LIKE AN ECONOMIST12Our Second Model:The Production Possibilities FrontierThe Production Possibilities Frontier(PPF):a graph that shows the combinations of two
10、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)Economy has 50,000 labor hours per month available for production.PPF ExampleProducing one computer requires 100 hours labor.Pro
11、ducing one ton of wheat requires 10 hours labor.5,00004,0001002,5002501,00040050,000040,00010,00025,00025,00010,00040,0000500050,000EDCBAWheatComputersWheatComputersProductionEmployment of labor hoursTHINKING LIKE AN ECONOMIST14Point on graphProductionCom-putersWheatA5000B4001,000C2502,500D1004,000E
12、05,000ABCDEPPF 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 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 i
13、t be possible for the economy to produce this combination of the two goods?1516Point F:100 computers,3000 tons wheatPoint F requires 40,000 hours of labor.Possible but not efficient:could get more of either good w/o sacrificing any of the other.F17Point G:300 computers,3500 tons wheatPoint G require
14、s 65,000 hours of labor.Not possible because economy only has 50,000 hours.GTHINKING LIKE AN ECONOMIST18The PPF:What We Know So FarPoints on the PPF(like A E)possibleefficient:all resources are fully utilizedPoints under the PPF(like F)possiblenot efficient:some resources underutilized(e.g.,workers
15、unemployed,factories idle)Points above the PPF(like G)not possibleTHINKING LIKE AN ECONOMIST19The PPF and Opportunity CostRecall:The opportunity cost 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 t
16、he 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 cost of one good in terms of the other.THINKING LIKE AN ECONOMIST20The PPF and Opportunity CostThe slope of a line equals the“rise over the run,”the amount
17、 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.21In which country is the opportunity cost of cloth lower?FRANCEENGLAND22FRANCEENGLANDEngland,because its PPF is not as steep as Frances.THINKING LIKE AN ECONOMIST23Econo
18、mic Growth and the PPFWith additional resources or an improvement in technology,the economy can produce more computers,more wheat,or any combination in between.Economic growth shifts the PPF outward.THINKING LIKE AN ECONOMIST24The Shape of the PPFThe PPF could be a straight line,or bow-shapedDepends
19、 on what happens to opportunity cost as economy shifts resources from one industry to the other.If opp.cost remains constant,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
20、 bow-shaped.THINKING LIKE AN ECONOMIST25Why the PPF Might Be Bow-ShapedMountain BikesBeerAs the economy shifts resources from beer to mountain bikes:PPF becomes steeperopp.cost of mountain bikes increases THINKING LIKE AN ECONOMIST26AWhy the PPF Might Be Bow-ShapedAt point A,most workers are produci
21、ng beer,even those that are better suited to building bikes.So,do not have to give up much beer to get more bikes.Mountain BikesBeerAt A,opp.cost of mtn bikes is low.THINKING LIKE AN ECONOMIST27BWhy the PPF Might Be Bow-ShapedAt B,most workers are producing bikes.The few left in beer are the best br
22、ewers.Producing more bikes would require shifting some of the best brewers away from beer production,would cause a big drop in beer output.Mountain BikesBeerAt B,opp.cost of mtn bikes is high.THINKING LIKE AN ECONOMIST28Why the PPF Might Be Bow-ShapedSo,PPF is bow-shaped when different workers have
23、different skills,different opportunity costs of producing one good in 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 uses).THINKING LIKE AN ECONOMIST29The PPF:A
24、 SummaryThe PPF shows all combinations of two goods that an economy 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 incre
25、asing opportunity cost.THINKING LIKE AN ECONOMIST30Microeconomics 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
26、 two branches of economics are closely intertwined,yet distinct they address different questions.The 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 pres
27、cribe how the 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 chaired from 2003 to 2005.3132Which of these statements
28、 are“positive”and which are“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 burritos will cause an increase in consumer d
29、emand for video rentals.33a.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 stim
30、ulate the economy.Normative another value judgment.d.An increase in the price of burritos 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.THINKING LIKE AN ECONOMIST35Why Economists DisagreeEconomists
31、often give conflicting 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 economis
32、ts agree.THINKING LIKE AN ECONOMIST36Propositions about Which Most Economists Agree (and%who agree)A ceiling on rents reduces the quantity and quality of housing available.(93%)Tariffs and import quotas usually reduce general economic welfare.(93%)The United States should not restrict employers from
33、 outsourcing work to foreign countries.(90%)The United States should eliminate agriculture subsidies.(85%)continuedTHINKING LIKE AN ECONOMIST37Propositions about Which Most Economists Agree (and%agreeing)The gap between Social Security funds and expenditures will become unsustainably large within th
34、e next fifty years if current policies remain unchanged.(85%)A large federal budget deficit has an adverse effect on the 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
35、control than imposition of pollution ceilings.(78%)FYI:Who Studies Economics?Ronald Reagan,President of the United States Barbara Boxer,U.S.Senator Sandra Day-OConnor,Former Supreme Court Justice Anthony Zinni,Former General,U.S.Marine Corps Kofi Annan,Former Secretary General,United Nations Meg Wit
36、man,Chief Executive Officer,eBay Steve Ballmer,Chief Executive Officer,Microsoft Arnold Schwarzenegger,Governor of California,Actor Ben Stein,Political Speechwriter,Actor,Game Show Host Mick Jagger,Singer for the Rolling Stones John Elway,NFL Quarterback Tiger Woods,Golfer Diane von Furstenburg,Fash
37、ion Designer38As scientists,economists try to explain the world using models with appropriate 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.Macroeconom
38、ics studies the economy as a whole.As policy advisers,economists offer advice on how to improve the world.39THINKING LIKE AN ECONOMIST40Problems and Applications:2.Imagine a society that produces military goods and consumer goods,which well call“guns”and“butter.”a.Draw a production possibilities fro
39、ntier for guns and butter.Using the concept of opportunity cost,explain why it most likely has a bowed-out shape.b.Show a point that is impossible for the economy to achieve.Show a point that is feasible but inefficient.40THINKING LIKE AN ECONOMIST41c.Imagine that the society has two political parti
40、es,called the Hawks(who want a strong military)and the Doves(who want a smaller military).Show a point on your production possibilities frontier that the Hawks might choose and a point the Doves might choose.41THINKING LIKE AN ECONOMIST42d.Imagine that an aggressive neighboring country reduces the s
41、ize of its military.As a result,both the Hawks and the Doves reduce their desired production of guns by the same amount.Which party would get the bigger“peace dividend,”measured by the increase in butter production?Explain.42THINKING LIKE AN ECONOMIST433.The first principle of economics discussed in
42、 Chapter 1 is that people face trade-offs.Use a production possibilities frontier to illustrate societys trade-off between two“goods”a clean environment and the quantity of industrial output.What do you suppose determines the shape and position of the frontier?Show what happens to the frontier if en
43、gineers develop a new way of producing electricity that emits fewer pollutants.43THINKING LIKE AN ECONOMIST446.Classify each of the following statements as positive or normative.Explain.a.Society faces a short-run trade-off between inflation and unemployment.b.A reduction in the rate of money growth will reduce the rate of inflation.c.The Federal Reserve should reduce the rate of money growth.d.Society ought to require welfare recipients to look for jobs.e.Lower tax rates encourage more work and more saving.44
