Post on 06-Mar-2018
Macroeconomics – study of performance, structure, behavior and decision-
making of the entire economy
Microeconomics – study of the decisions of households and firms and their
interaction
Economics is a science
Devise theories, collect and analyze data; use the scientific method
Economic Models – diagrams, graphs and equations used to represent
economic processes and theory
Chapter 2 – Thinking Like an Economist
Positive Statements – statements that describe the world as it is.
“A rise in consumer incomes will lead to a rise in the demand for new cars.”
“A fall in the exchange rate will lead to an increase in exports overseas.”
“More competition in markets can lead to lower prices for consumers.”
“If the government raises the tax on beer, this will lead to a fall in profits of the
brewers.”
Normative Statements – opinions that describe how the world should be
“The government should increase the national minimum wage to £6 per hour in
order to reduce relative poverty.”
“The government is right to introduce a ban on smoking in public places.”
“The retirement age should be raised to 75 to combat the effects of our ageing
population.”
Positive vs. Normative Statements
Circular-flow diagram – visual model of the economy simplified into
households and firms communicating in the factor and product market
Shows how dollars flow through markets among households and
firms
Circular-Flow Diagram
- Factors of Production - resources required to produce goods and services
Land
Labor
Capital
Entrepreneurship
Factors of Production
Labor
Capital Capital – resource that is used to produce additional goods
and services
Physical Capital – also known as Capital Goods, Human
made objects used to create other goods and services
Human Capital – collective amount of skills, abilities, and
specialized growth of people.
Entrepreneurs
Goods Good – physical, tangible(touchable) product
i.e. – Automobiles, Video Games, Cell Phones, CD’s,
Tickle Me Elmo, etc…
Services Service – a non-tangible action or activity that is performed
for someone else
i.e – Financial Advisor, Stock Broker, Movies, Dentist,
Teachers, etc..
Household – Person or group of people living in a residence;
consumers of goods/services
Firm – business, organization that uses resources to produce a
product, which it then sells
Households and Firms
Product Markets – Houses and firms interact; producers sell
their goods and services to consumers
Product Markets
Factor Markets – the markets where productive resources (F.O.P)
are bought and sold
Labor - Firms (businesses) hire workers and pay them salaries
Land - Purchase/rent land
Capital - Use money from households (spending, savings,
investment, etc) to purchase capital goods
Factor Markets
Circular Flow Model of Economic Activity
Households Firms
Factor
Market
Product
Market
Consumer Spending/Investing
Goods and Services Purchased Goods and Services Sold
Business Income/Revenue
Land, Labor, Capital, Entrepreneurs
- provided by individuals Inputs for Production (F.O.P.)
Payment for F.O.P. – Rent (Land) Wages
(Labor), Interest (Capital),
Profit (Entrepreneurs)
Income to Households/Individuals
Households• Buy and Consume
Goods and Services
•Own and sell
the F.O.P
Firms
(Business)• Produce and sell
Goods and Services
•Hire and use F.O.P.
Product
Market•Market for Goods
and Services
•Firms sell
Households Buy
Factor
MarketMarket for F.O.P
•Households sell
•Firms buy
Application Questions1. In the factor market, what do businesses provide households?
2. The flow of goods and services in the product market is represented by which
firm and products on the model below?
3. When you apply for a job at the local Starbucks which market are you in?
4. Which color arrows represent the flow of money; what color arrows represent
the flow of inputs and outputs.
Daily Assignment - Circular Flow Model of Economic Activity
Household1. ________________________
FirmFirm 1. _____________________________
Factor Market
Product Market
Consumer Spending
1. _________________________
Goods Purchased
1. ______________________________
2. _______________________________
Goods Offered1. ___________________________
2. ___________________________
Business Income
1. _________________________
Factor of Production Offered
1. ___________________________
Inputs for Production
1. ___________________________
Payments for F.O.P
1. _________________
Weekly Income
1. __________________
Circular Flow Model of a Mixed Economy
HouseholdsFirms
Factor
Market
Product
Market
Consumer Spending/Investing
Goods and
Services
Purchased:
Goods and Services
Sold
Business Income/Revenue
Land, Labor,
Capital,
Entrepreneur
Inputs for
Production
(F.O.P.)
Payment for F.O.P. –
Wages, rent,
capital goods
Income to Households/Individuals
Expenditures Expenditures
PPF Model – shows various combinations of output that an economy can
produce given the productive resources available
used to visually represent tradeoffs and opportunity cost
Quantity of
Computers
Produced
Quantity of
Cars Produced
0 300 600 700 1,000
3,000
AB
E
F
1,000
2,2002,000
Production
Possibilities
Frontier
Possibility Tickle Me Elmo Cookie Monster
a 0 and 15
b 8 and 13
c 14 and 11
d 18 and 7
e 21 and 5
f 25 and 0
Tickle Me Elmo's (millions per month)
5 10 15 20
25
5
10
15a
b
c
d
Coo
kie
Monste
rs (
mill
ions p
er
month
)
e
20
f
0
(PPC) – shows combinations of production and the opportunity cost at each point
(at the margin)
Efficiency – using resources in such a way as to maximize the production of
goods and services *Points along the line (a – f) *
Production
Possibilities
Frontier
Underutilization – using fewer resources than an economy/business is
capable of; inefficient use of resources
Point X
Unattainability – currently unable to produce at that level
Point Y
x
y
Underutilization
Unattainable
Growth – the change in ability to produce, reflects a
change in the curve New frontier (usually as a result of new technology)
Good A1 2 3 4 5 6
Go
od
B12
10
8
6
4
2
0
Good A Good B
0 12
1 10
2 8
3 6
4 4
5 2
6 0
Answer the following questions based on the model above:
1. The opportunity cost of increasing production from Good A from zero units to
one unit is the loss of __________ unit (s) of Good B.
2. The opportunity cost of increasing production from Good A from one unit to
two unit is the loss of __________ unit (s) of Good B. The total loss is _____
3. The opportunity cost of increasing production from Good A from zero units to
6 units is the loss of _________ unit (s) of Good B.
PPC Application
Good A1 2 3 4 5 6
Go
od
B12
10
8
6
4
2
0
Good A Good B
0 12
1 10
2 8
3 6
4 4
5 2
6 0
Answer the following questions based on the model above:
1. The opportunity cost of increasing production from Good A from zero units to
one unit is the loss of __________ unit (s) of Good B.
2. The opportunity cost of increasing production from Good A from one unit to
two unit is the loss of __________ unit (s) of Good B. The total loss is _____
3. The opportunity cost of increasing production from Good A from zero units to
6 units is the loss of _________ unit (s) of Good B.
PPC Application
2
2
12
4
Good A1 2 3 4 5 6
Go
od
B12
10
8
6
4
2
0
Good A Good B
0 12
1 10
2 8
3 6
4 4
5 2
6 0
Answer the following questions based on the model above:
1. The opportunity cost of increasing production from Good A from zero units to
one unit is the loss of __________ unit (s) of Good B.
2. The opportunity cost of increasing production from Good A from one unit to
two unit is the loss of __________ unit (s) of Good B. The total loss is _____
3. The opportunity cost of increasing production from Good A from zero units to
6 units is the loss of _________ unit (s) of Good B.
PPC Application
2
2
12
4
Unattainable/Future Growth
Underutilzation/Ineffeciency
26
Quantity of
Computers
Produced
Quantity of
Cars
Produced
0 300 600 700 1,000
3,000
AB
C
D
E
F
1,000
2,2002,000
Production
Possibilities
Frontier
•The production
possibilities frontier shows
the combinations of output
- in this case, cars and
computers that the
economy can possibly
produce.
•The economy can produce
any combination on or
inside the frontier.
•Points outside the frontier
are not feasible given the
economy’s resources.
Underutilzation/
Inefficiency
Unnattainable/Future Growth
27
Quantity of
Computers
Produced
Quantity of
Cars Produced
0 600 650 1,000
3,000
A2,2002,300
•A technological advance in
the computer industry
enables the economy to
produce more computers
for any given number of
cars.
• As a result, the production
possibilities frontier shifts
outward. If the economy
moves from point A to point
G, then the production of
both cars and computers
increases.
4,000
G
Materials for each student:
8 sheets of 8 1/2 x 11 paper 1 roll tape 1 pair
scissors 1 pencil or pen
Conducting the experiment:
For each round, students begin with 16 strips,
16 rectangles, a pen, a roll of tape, and a pair of
scissors.
Resources may not be carried over from one
period to the next
You will have 4 minutes of production time for each
round.
1. Round 1: Make 16 smiles and as many links as you
can.
2. Round 2: Make only links.
3. Round 3: Make only smiles.
4. Round 4: Make 4 smiles and as many links as you
can.
Record the number of links and smiles you produce
in each round.
Graph your results
Links Smiles
1. What products were scarce?
2. Why were some groups more
productive than others?
3. How did you increase productivity?
4. What could have allowed for growth?
5. What could have led to underutilization?
6. How does this relate to the real world?
Wine3 6 9 12 15 18
Gra
in18
15
12
9
6
3
0
Wine Grain
0 15
5 14
9 12
12 9
14 5
15 0
Answer the following questions based on the model above:
1. What do the points along the curve represent?
2. What does the point at letter a represent?
3. Why is letter b currently unattainable; what could allow this society to reach
letter b?
4. Why is the shape of the PPC downward sloping?
PPC Review
a
b
Wine3 6 9 12 15 18
Gra
in18
15
12
9
6
3
0
Wine Grain
0 15
5 14
9 12
12 9
14 5
15 0
Answer the following questions based on the model above:
1. What do the points along the curve represent?
2. What does the point at letter a represent?
3. Why is letter b currently unattainable; what could allow this society to reach
letter b?
4. Why is the shape of the PPC downward sloping?
PPC Review
a
b