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Mankiw Chapter 2 Slides
Mankiw Chapter 2 Slides
Mankiw Chapter 2 Slides
A road map
A model of human
anatomy from high
school biology class
A model airplane
Households:
Households:
own
own the
the factors
factors of
of production,
production,
sell/rent
sell/rent them
them to
to firms
firms for
for income
income
buy
buy and
and consume
consume goodsgoods & & services
services
Firms Households
Firms Households
Firms:
Firms:
buy/hire
buy/hire factors
factors of
of production,
production,
use
use them
them toto produce
produce goods
goods
and
and services
services
CHAPTER
sell
sell goods
goods &
& services
services
2 THINKING LIKE AN ECONOMIST 12
FIGURE 1: The Circular-Flow Diagram
Revenue Spending
Markets for
G&S Goods &
G&S
sold Services bought
Firms Households
Wheat
Production
Point (tons)
on Com- 6,000
graph puters Wheat E
5,000
4,000
D
A 500 0
B 400 1,000 3,000 C
C 250 2,500 2,000
B
D 100 4,000 1,000
A
E 0 5,000 0
0 100 200 300 400 500 600
Computers
17
A C T I V E L E A R N I N G 1:
Answers
Point F: Wheat
(tons)
100 computers,
6,000
3000 tons wheat
5,000
Point F requires 4,000
40,000 hours
3,000
of labor. 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.
18
A C T I V E L E A R N I N G 1:
Answers
Point G: Wheat
(tons)
300 computers,
6,000
3500 tons wheat
5,000
Point G requires 4,000
65,000 hours G
of labor. 3,000
Not possible 2,000
because 1,000
economy
0
only has
0 100 200 300 400 500 600
50,000 hours.
Computers
19
The PPF: What We Know Far
Points on the PPF (like A – E)
• possible
• efficient: all resources are fully utilized
Points under the PPF (like F)
• possible
• not efficient: some resources underutilized
(e.g., workers unemployed, factories idle)
Points above the PPF (like G)
• not possible
500 500
400 400
300 300
200 200
100 100
0 0
0 100 200 300 400 0 100 200 300 400
Cloth Cloth
23
A C T I V E L E A R N I N G 2:
Answers
England, because its PPF is not as steep as France’s.
FRANCE ENGLAND
Wine Wine
600 600
500 500
400 400
300 300
200 200
100 100
0 0
0 100 200 300 400 0 100 200 300 400
Cloth Cloth
24
Economic Growth and the PPF
With additional Wheat
resources or an (tons) Economic
Economic
6,000 growth
growth shifts
shifts
improvement in
the
the PPF
PPF
technology, 5,000 outward.
outward.
the economy can 4,000
produce more
3,000
computers,
more wheat, 2,000
Computers
As the economy
shifts resources
from Computers to
Cars:
• PPF becomes
steeper
• opp. cost of Cars
increases
Cars
At point A, At
At A,
A, opp.
opp. cost
cost of
of
Computers
A Cars
Cars is
is low.
low.
most workers are
producing
Computers,
even those that
are better suited
to building Cars.
So, do not have to
give up much Comp
to get more Cars. Cars
At B, most workers
Computers
At
At B,
B, opp.
opp. cost
cost
are producing Cars. of
of Cars
Cars is
is high.
high.
The few left in Comp
are the best
Comp.tech. B
Producing more Cars
would require shifting
some of the best
Comp.tech away
from Comp
Cars
production,
would cause a big
29
drop in Comp output.
Why the PPF Might Be Bow-Shaped
So, PPF is bow-shaped when different workers
have 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
34
A C T I V E L E A R N I N G 3:
Answers
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.
35
A C T I V E L E A R N I N G 3:
Answers
c. A tax cut is needed to stimulate the economy.
Normative, 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.
36
Why Economists Disagree
Economists 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 economists agree.