Microeconomics CH.2 Economics as science

Efficiency v Inefficiency

Any combination of two items inside PPF are not efficient Any combination of two items on PPF are efficient

Attainable v Unattainable

Any combination of two items on or inside PPF are attainable Any combination of two items outside PPF are unattainable

Inefficient outcome

Any point inside the PPF curve

Efficient outcome

Any point on the PPF curve

Opportunity cost of producing cars is highest when we are already producing a lot of cars because we must allocate machines that are specialized in producing computers to make---steeper cost=steeper slope

Bowed shape of PPF due to specialization

Assumptions

Can simplify the complex world Make it easier to understand allows us to focus on essence of the problem

2 Economic models

Circular-Flow diagram Production possibilities frontier

Production possibilities frontier

Combinations of output economy can possibly produce given the available factors of production and production technology

Economic models

Diagrams and equations that is built with assumptions

Positive Statement

Facts: Descriptive Based on evidence Objective

Households want

Goods and Services (output)

Factors of production

Inputs: Labor, Capital, Land, Raw material

Focus on economy as a whole

Macroeconomics

Households are sellers Firms are buyers

Markets for Factors of production

Firms are sellers Households are buyers

Markets for Goods and Services

Input market

Markets for factors of production

Output market

Markets for goods and services

Focus on individual

Microeconomics

Claims that attempt to prescribe how the world should be

Normative Statements

Normative Satements

Opinions: Prescriptive Based on value judgement Subjective Cannot be tested/refuted, but can be pursuaded

Cost of producing one good is the giving up of producing less of the other good

PPF shows opportunity cost

The only way to produce more of one good is to produce less of the other good

PPF shows trade-off

Claims that attempt to describe the world as it is

Positive Statements

Possible combination of output with given resources and technology

Production possibilities frontier

_____ simplifies a complex economy to highlight ideas of scarcity, efficiency, trade-off, opportunity cost, and economic growth

Production possibilities frontier

Subjects most economists agree on

Rent ceilings reduces the quantity and quality of housing available Tariffs and import quotas usually reduce general economic welfare US should not restrict employers from outsourcing work US should eliminate agricultural subsidies Cash payments increase welfare of recipients Redistribution if income is legitimate role of gov. Minimum wage increases unemployment among young and unskilled

Opportunity cost on PPF

Slope shows the cost

Macroeconomics

Study of economy-wide phenomena, including inflation, unemployment, and economic growth

Microeconomics

Study of how households and firms make decisions and how they interact in markets

Outward shift of Production possibilities frontier represents

Technological advance Economic growth Ability to produce more of both goods

Economists may disagree because

Validity of alternative positive theories Different social values Difference in scientific judgments Different hunches and assumptions

Circular-flow diagram

Visual model of the economy Shows money flow through markets among households and firms

Firms have

ability to make goods and services (output)

different assumptions

allows us to answer different questions

Shape of production possibilities frontier

bowed shape

Scientific method

dispassionate development and testing of theories about how the world works Must give unbiased answers based on facts only

Households have

factors of production (inputs)

Economics is a social science because

it's the study of people

Economists depend on

natural experiments offered by history

Circular-flow diagrams assumes there are

only 2 decision maker; households and firms at least 2 markets; Input market and output market

To produce 100 cars, 200 computers are given up

opportunity cost on PPF

Technological advance shifts PPF

outward

Bowed out production possibility frontier is due to

resource specialization

observation, theory, more observation

scientific method

Firms want

to hire and use factors of production (inputs)

Conducting experiment is difficult in study of economics because

you cannot experiment on people