Ch02

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  • In this diagram, the green arrows represent flows of income/payments. The red arrows represent flows of goods and services (including services of the factors of production in the lower half of the diagram).
  • Ch02

    1. 1. Thinking Like an Economist PowerPoint Slides prepared by: Andreea CHIRITESCU Eastern Illinois University© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as 1permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
    2. 2. The Economist as a Scientist • Economics – Social science • Economists – Scientists • Devise theories • Collect data • Analyze these data – Verify or refute their theories© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as 2permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
    3. 3. The Economist as a Scientist The role of assumptions • Assumptions – Can simplify the complex world • Make it easier to understand – Focus our thinking - essence of the problem • Different assumptions – To answer different questions – Short-run or long-run effects© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as 3permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
    4. 4. The Economist as a Scientist • Economic models – Diagrams & equations – Omit many details – Allow us to see what’s truly important – Built with assumptions – Simplify reality to improve our understanding of it© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as 4permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
    5. 5. Which would you prefer if you want to find your way to the Curlew parking lot?Simple Map view Real Arial View•Or: Drive 2 miles, turn right on Ocean Dr.; drive 2,400 ft., turn right on Sand dollar Blvd.; drive 300 ft., turn right on Curlew Dr.; hit the brake
    6. 6. The Economist as a Scientist • Circular-flow diagram – Visual model of the economy – Shows how dollars flow through markets among households and firms • Decision makers – Firms & Households • Markets – For goods and services – For factors of production© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as 6permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
    7. 7. FIGURE 1: The Circular-Flow Diagram Revenue Spending G&S G&S sold bought Factors of Labor, land, production Markets for capital Factors ofWages, rent, Production Income profit •7
    8. 8. The Economist as a Scientist • Firms – Produce goods and services – Use factors of production / inputs • Households – Own factors of production – Consume goods and services© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as 8permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
    9. 9. The Economist as a Scientist • Markets for goods and services – Firms – sellers – Households – buyers • Markets for inputs – Firms – buyers – Households - sellers© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as 9permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
    10. 10. The Economist as a Scientist • Production possibilities frontier – A graph – Combinations of output that the economy can possibly produce – Given the available • Factors of production • Production technology© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as 10permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
    11. 11. Figure 2The production possibilities frontier Quantity of Computers The production Produced possibilities frontier shows the combinations C of output—in this case, 3,000 F cars and computers— Production that the economy can A Possibilities possibly produce. The 2,200 2,000 B Frontier economy can produce any combination on or inside the frontier. Points D outside the frontier are 1,000 not feasible given the E economy’s resources. 0 300 600 700 1,000 Quantity of Cars Produced© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as 11permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
    12. 12. The Economist as a Scientist • Efficient levels of production – The economy is getting all it can • From the scarce resources available – Points on the production possibilities frontier – Trade-off: • The only way to produce more of one good • Is to produce less of the other good© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as 12permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
    13. 13. The Economist as a Scientist • Inefficient levels of production – Points inside production possibilities frontier • Opportunity cost of producing one good – Give up producing the other good – Slope of the production possibilities frontier© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as 13permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
    14. 14. The Economist as a Scientist • Technological advance – Outward shift of the production possibilities frontier – Economic growth – Produce more of both goods© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as 14permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
    15. 15. Figure 3 A shift in the production possibilities frontier Quantity of Computers Produced A technological advance 4,000 in the computer industry enables the economy to produce more computers 3,000 for any given number of G cars. As a result, the 2,300 production possibilities 2,200 A frontier shifts outward. If the economy moves from point A to point G, then the production of both cars and computers increases. 0 600 650 1,000 Quantity of Cars Produced© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as 15permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
    16. 16. The Economist as a Scientist • Microeconomics – The study of how households and firms make decisions – And how they interact in markets • Macroeconomics – The study of economy-wide phenomena, including inflation, unemployment, and economic growth© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as 16permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
    17. 17. The Economist as a Policy Adviser Positive vs. Normative analysis • Positive statements – Attempt to describe the world as it is – Descriptive – Confirm or refute by examining evidence • Normative statements – Attempt to prescribe how the world should be – Prescriptive© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as 17permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
    18. 18. The Economist as a Policy Adviser • Economists in Washington – Council of Economic Advisers • Advise the president of the United states • Annual Economic Report of the President – Office of Management and Budget – Department of the Treasury – Department of Labor – Department of Justice – Congressional Budget Office – The Federal Reserve© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as 18permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

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