Transcript Production Possibilities Frontier….

The Economic Way of Thinking
 The
Scientific Method uses
abstract models to help
understand how a complex
real-world operates.
 The Scientific Method
develops theory, collects
and analyzes data to prove
the theory.
Principles of Microeconomics & Principles of Macroeconomics: Ch. 2
First Canadian Edition
The Circular-Flow Model
Provides
a simple way of describing all
the economic transactions that occur
in a Market Economy.
Emphasizes
decentralization in that
economic decisions are made by
Households and Businesses in
Product and Resource Markets.
Principles of Microeconomics & Principles of Macroeconomics: Ch. 2
First Canadian Edition
Diagram: The Circular-Flow Model
Product
Markets
$
$
Dollar Flow
Real Flow
Businesses
Households
$
$
Resource Markets
Principles of Microeconomics & Principles of Macroeconomics: Ch. 2
First Canadian Edition
Microeconomics and Macroeconomics
focuses on “the
individual parts of the economy.”
Microeconomics
– e.g. individual markets
– e.g. price increase in the house market
Macroeconomics
looks at the
“economy as a whole.”
– e.g. aggregate of markets
– e.g. average price increase for all goods
Principles of Microeconomics & Principles of Macroeconomics: Ch. 2
First Canadian Edition
A Second Economic Model:
Production Possibilities Frontier….
… is a graph that shows the various
combinations of output that the
economy can possibly produce given
the available factors of production and
technology.
Principles of Microeconomics & Principles of Macroeconomics: Ch. 2
First Canadian Edition
Production Possibilities Frontier
E
3000
A
2000
F
0
700
Principles of Microeconomics & Principles of Macroeconomics: Ch. 2
1000
Cars
First Canadian Edition
Production Possibilities Frontier
E
3000
A
2000
F
0
700
Principles of Microeconomics & Principles of Macroeconomics: Ch. 2
1000
Cars
First Canadian Edition
Principles of Economics Illustrated by
the Production Possibilities Frontier . . .
Efficiency
Tradeoffs
Opportunity
Cost
Economic Growth
Principles of Microeconomics & Principles of Macroeconomics: Ch. 2
First Canadian Edition
Production Possibilities Frontier
Efficient
Resource Use
E
3000
A
2000
B?
1000
F
0
300
700
Principles of Microeconomics & Principles of Macroeconomics: Ch. 2
1000
Cars
First Canadian Edition
Production Possibilities Frontier
E
Tradeoffs
3000
A
2000
C
1000
F
0
700
900
Principles of Microeconomics & Principles of Macroeconomics: Ch. 2
1000
Cars
First Canadian Edition
Production Possibilities Frontier
E
3000
2000
Opportunity Cost of next 200 cars
is 1000 computers. Opportunity
cost of 1 car is 5 computers
A
C
1000
Opportunity
Cost
F
0
700
900
Principles of Microeconomics & Principles of Macroeconomics: Ch. 2
1000
Cars
First Canadian Edition
Production Possibilities Frontier
Economic Growth
3000
2000
1000
0
300
700
Principles of Microeconomics & Principles of Macroeconomics: Ch. 2
1000
Cars
First Canadian Edition
Positive versus Normative Analysis
Positive:
Statements or assertions
dealing with matters of fact or
questions about how things are
(descriptive analysis).
Normative: Statements that reflect
individual opinions (prescriptive
analysis).
Principles of Microeconomics & Principles of Macroeconomics: Ch. 2
First Canadian Edition
Positive or Normative Statements?
 An
increase in the minimum wage will cause a
decrease in employment among the least skilled.
 Higher federal budget deficits will cause interest
rates to increase.
 The income gains from a higher minimum wage
are worth more than any slight reduction in
employment.
 Provincial governments should be allowed to
collect from tobacco companies the costs of
treating smoking-related illnesses among the
poor.
Principles of Microeconomics & Principles of Macroeconomics: Ch. 2
First Canadian Edition
Economists in Government . . .
 Department
of Finance - formulate tax policy.
 Industry Canada - design competition policy.
 Foreign Affairs - assist with trade agreements.
 Human Resources Development Canada formulate labour market policies.
 Bank of Canada - implement monetary policy.
 Environment Canada - design environmental
policy.
Principles of Microeconomics & Principles of Macroeconomics: Ch. 2
First Canadian Edition
Economists in the Private Sector . . .
 C.D.
Howe Institute - suggest policy options.
 Fraser Institute - suggest policy options.
 Provide forecasts for companies.
 Assist firms manage resources efficiently.
 Assist with investment decisions.
Principles of Microeconomics & Principles of Macroeconomics: Ch. 2
First Canadian Edition
Do Economists Always Agree With Each
Other? Three reasons why they don’t:
Disagree about the validity of
alternative positive theories
Each have different values, thus
different normative views
Advice of charlatans or cranks
complicates ability to agree
Principles of Microeconomics & Principles of Macroeconomics: Ch. 2
First Canadian Edition
Thinking Like an Economist . . .
 Economics
uses the scientific approach.
 Economics
is divided into Microeconomics
and Macroeconomics.
 Economics
is analyzed through both
Positive and Normative statements.
Principles of Microeconomics & Principles of Macroeconomics: Ch. 2
First Canadian Edition