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Micro Ch02 Lecnotes6e
Micro Ch02 Lecnotes6e
In this chapter,
look for the answers to these questions:
What 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 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
macroeconomics? Between positive and normative?
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Some Familiar Models
A road map
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A model of human
anatomy from high
school biology class
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A model airplane
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2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license
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Our First Model:
The Circular-Flow Diagram
The Circular-Flow Diagram: a visual model of
the economy, shows how dollars flow through
markets among households and firms
Two types of actors:
households
firms
Two markets:
the market for goods and services
the market for factors of production
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Factors of Production
The definition of capital shown on this slide (buildings
Factors of production: the resources the
and machines) is the same that appears in the
economy uses to produce goods & services, corresponding section of the chapter. A more formal
including
labor definition will be provided in subsequent chapters.
land
capital (buildings & machines used in
production)
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FIGURE 1: The Circular-Flow Diagram This and the following slide build the Circular-Flow
Households: Diagram piece by piece.
Own the factors of production,
sell/rent them to firms for income
Buy and consume goods & services
Firms Households
Firms:
Buy/hire factors of production,
use them to produce goods
and services
Sell goods & services
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FIGURE 1: The Circular-Flow Diagram In this diagram, the green arrows represent flows of
Revenue
Markets for
Spending income/payments. The red arrows represent flows of
Goods &
G&S
sold Services
G&S
bought
goods and services (including services of the factors of
production in the lower half of the diagram).
Firms Households
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Our Second Model:
The Production Possibilities Frontier
The 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 wheat
One resource: labor (measured in hours)
Economy has 50,000 labor hours per month
available for production.
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PPF Example
Wheat
Point Production
(tons)
on Com- 6,000
graph puters Wheat E
5,000
A 500 0 D
4,000
B 400 1,000
3,000 C
C 250 2,500
2,000
D 100 4,000 B
1,000
E 0 5,000 A
0
0 100 200 300 400 500 600
Computers
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2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license
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ACTIVE LEARNING 1
Answers
Wheat
Point F: (tons)
100 computers, 6,000
3000 tons wheat
5,000
Point F requires 4,000
40,000 hours
of labor. 3,000
F
Possible but 2,000
not efficient: 1,000
could get more
0
of either good
0 100 200 300 400 500 600
w/o sacrificing
Computers
any of the other.
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ACTIVE LEARNING 1
Answers
Wheat
Point G: (tons)
300 computers, 6,000
3500 tons wheat
5,000
Point G requires 4,000 G
65,000 hours
3,000
of labor.
Not possible 2,000
because 1,000
economy 0
only has 0 100 200 300 400 500 600
50,000 hours. Computers
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2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
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2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license
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The PPF and Opportunity Cost
Here, the rise is a negative number, because as you
Wheat The slope of a line move to the right, the line falls (meaning wheat output is
(tons)
6,000 slope =
1000
= 10
equals the
rise over the run,
reduced).
100
5,000 the amount the line
4,000
rises when you
3,000
move to the right by
one unit.
Moving to the right involves shifting resources from the
2,000
1,000
Here, the production of wheat (which causes wheat output to fall) to
opportunity cost of
0 a computer is the production of computers (which causes computer
0 100 200 300 400 500 600 10 tons of wheat.
Computers production to rise). Producing an additional computer
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20
requires the resources that would otherwise produce 10
tons of wheat.
400 400
300 300
200 200
100 100
0 0
0 100 200 300 400 0 100 200 300 400
Cloth Cloth
400
500
400
France must give up two units of wine to get an additional
300 300 unit of cloth. The slope of Englands PPF = -200/300 = -
200
100
200
100
2/3, meaning that England only must sacrifice 2/3 of a
0
0 100 200 300 400
0
0 100 200 300 400
unit of wine to get an additional unit of cloth. Thus, the
Cloth Cloth
opportunity cost of cloth is lower in England than France.
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The PPF shows the tradeoff between the outputs of different
Economic Growth and the PPF
Wheat
goods at a given time, but the tradeoff can change over time.
With additional
(tons) Economic
resources or an growth shifts
6,000
improvement in
technology, 5,000
the PPF
outward.
For example, over time, the economy might get more workers
the economy can
produce more
4,000 (or more factories or more land). Or, a more efficient
3,000
computers,
2,000
technology might be invented. Both eventsan increase in the
more wheat,
or any combination 1,000 economys resources or an improvement in technologycause
in between. 0
0 100 200 300 400 500 600
an expansion in the set of opportunities. That is, both allow the
Computers
economy to produce more of one or both goods.
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As the economy
shifts resources
from beer to
mountain bikes:
PPF becomes
steeper
opp. cost of
mountain bikes
increases
Mountain
Bikes
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Why the PPF Might Be Bow-Shaped
Here, we are using workers for the more general
At A, opp. cost of
resources, to keep things simple and consistent with the
Beer
At point A,
most workers are
A mtn bikes is low. previous examples.
producing beer,
even those who
are better suited
to building bikes.
So, do not have to
give up much beer
to get more bikes.
Mountain
Bikes
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At B, opp. cost
are producing bikes. of mtn bikes
The few left in beer is high.
are the best brewers.
Producing more B
bikes would require
shifting some of the
best brewers away
from beer production,
causing a big drop in Mountain
beer output. Bikes
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The PPF: A Summary
The 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
increasing opportunity cost.
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ACTIVE LEARNING 3
Identifying positive vs. normative
Which of these statements 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 demand for music
downloads.
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ACTIVE LEARNING 3
Answers
a. Prices rise when the government increases the
quantity of money.
Positive describes a relationship, could use
data to confirm or refute.
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ACTIVE LEARNING 3
Answers
c. A tax cut is needed to stimulate the economy.
Normative another value judgment.
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Propositions about Which Most This slide and the next show several of the Propositions
Economists Agree (and % who agree)
A ceiling on rents reduces the quantity and quality
appearing in Table 1 of the chapter. For the full list, see
of housing available. (93%) Table 1 in the chapter.
Tariffs and import quotas usually reduce general
economic welfare. (93%)
The United States should not restrict employers Note: Some of the terms appearing in these statements
from outsourcing work to foreign countries. (90%)
The United States should eliminate agriculture
have not yet been defined, so you may wish to define
subsidies. (85%) them to students as they appear on the screen.
continued
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If youre pressed for time, delete the following slide and
refer your students to Table 1 in the chapter.
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Propositions about Which Most Continued from previous slide.
Economists Agree (and % agreeing)
The gap between Social Security funds and
expenditures will become unsustainably large
within the 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 control
than imposition of pollution ceilings. (78%)
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FYI: Who Studies Economics? This FYI lists people who studied economics in college. It
Ronald Reagan, President of the United States
Barbara Boxer, U.S. Senator
is a fun way to lighten up the lecture. On the other hand,
Sandra Day-OConnor, Former Supreme Court Justice
Anthony Zinni, Former General, U.S. Marine Corps
if youre running short on time, this is a good candidate to
Kofi Annan, Former Secretary General, United Nations skipstudents will readily find it when they read the
Meg Witman, Chief Executive Officer, eBay
Steve Ballmer, Chief Executive Officer, Microsoft chapter.
Arnold Schwarzenegger, Former Gov. of California, Actor
Ben Stein, Political Speechwriter, Actor, Game Show Host
Mick Jagger, Singer for the Rolling Stones
John Elway, NFL Quarterback
(Due to space limitations, this slide omits a few of the
Tiger Woods, Golfer names in the corresponding FYI box in the text.)
Diane von Furstenburg, Fashion Designer
38
S U M M ARY
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