38 PART I INTRODUCTION

S UM MA R Y
• Economists try to address their subject with a • A positive statement is an assertion about
scientist’s objectivity. Like all scientists, they how the world is. A normative statement is
make appropriate assumptions and build sim- an assertion about how the world ought to be.
plified models to understand the world around When economists make normative statements,
them. Two simple economic models are the they are acting more as policy advisers than
circular-flow diagram and the production pos- scientists.
sibilities frontier.
• Economists who advise policymakers offer con-
• The field of economics is divided into two flicting advice either because of differences in
subfields: microeconomics and macroeconom- scientific judgments or because of differences
ics. Microeconomists study decision making in values. At other times, economists are united
by households and firms and the interaction in the advice they offer, but policymakers may
among households and firms in the marketplace. choose to ignore it.
Macroeconomists study the forces and trends
that affect the economy as a whole.

K EY CONC
CON C EP T S
circular-flow diagram, p. 24 microeconomics, p. 29 positive statements, p. 31
production possibilities macroeconomics, p. 29 normative statements, p. 31
frontier, p. 26

QU ESTIO NS FO R RE V IE W
1. How is economics a science? cookies. What happens to this frontier if disease
2. Why do economists make assumptions? kills half of the economy’s cows?
3. Should an economic model describe reality 7. Use a production possibilities frontier to
exactly? describe the idea of “efficiency.”
4. Name a way that your family interacts in the 8. What are the two subfields into which eco-
factor market and a way that it interacts in the nomics is divided? Explain what each subfield
product market. studies.
5. Name one economic interaction that isn’t cov- 9. What is the difference between a positive and a
ered by the simplified circular-flow diagram. normative statement? Give an example of each.
6. Draw and explain a production possibilities 10. Why do economists sometimes offer conflicting
frontier for an economy that produces milk and advice to policymakers?

P RO BLE MS AN D A P PLI
LI CAT I O NS
1. Draw a circular-flow diagram. Identify the b. Stuart earns $4.50 per hour working at a fast-
parts of the model that correspond to the flow food restaurant.
of goods and services and the flow of dollars c. Shanna spends $30 to get a haircut.
for each of the following activities. d. Sally earns $10,000 from her 10 percent
a. Selena pays a storekeeper $1 for a quart of ownership of Acme Industrial.
milk.

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 CHAPTER 2 THINKING LIKE AN ECONOMIST 39

2. Imagine a society that produces military goods • All three spend half their time on each
and consumer goods, which we’ll call “guns” activity. (C)
and “butter.” • Larry spends half his time on each activity,
a. Draw a production possibilities frontier for while Moe only washes cars and Curly
guns and butter. Using the concept of oppor- only mows lawns. (D)
tunity cost, explain why it most likely has a b. Graph the production possibilities frontier
bowed-out shape. for this economy. Using your answers to
b. Show a point that is impossible for the econ- part (a), identify points A, B, C, and D on
omy to achieve. Show a point that is feasible your graph.
but inefficient. c. Explain why the production possibilities
c. Imagine that the society has two politi- frontier has the shape it does.
cal parties, called the Hawks (who want a d. Are any of the allocations calculated in part
strong military) and the Doves (who want a (a) inefficient? Explain.
smaller military). Show a point on your pro- 5. Classify the following topics as relating to
duction possibilities frontier that the Hawks microeconomics or macroeconomics.
might choose and a point the Doves might a. a family’s decision about how much income
choose. to save
d. Imagine that an aggressive neighboring b. the effect of government regulations on auto
country reduces the size of its military. As a emissions
result, both the Hawks and the Doves reduce c. the impact of higher national saving on eco-
their desired production of guns by the same nomic growth
amount. Which party would get the bigger d. a firm’s decision about how many workers
“peace dividend,” measured by the increase to hire
in butter production? Explain. e. the relationship between the inflation rate
3. The first principle of economics discussed in and changes in the quantity of money
Chapter 1 is that people face trade-offs. Use 6. Classify each of the following statements as
a production possibilities frontier to illustrate positive or normative. Explain.
society’s trade-off between two “goods”—a a. Society faces a short-run trade-off between
clean environment and the quantity of indus- inflation and unemployment.
trial output. What do you suppose determines b. A reduction in the rate of money growth will
the shape and position of the frontier? Show reduce the rate of inflation.
what happens to the frontier if engineers c. The Federal Reserve should reduce the rate
develop a new way of producing electricity of money growth.
that emits fewer pollutants. d. Society ought to require welfare recipients to
4. An economy consists of three workers: Larry, look for jobs.
Moe, and Curly. Each works ten hours a day e. Lower tax rates encourage more work and
and can produce two services: mowing lawns more saving.
and washing cars. In an hour, Larry can either 7. If you were president, would you be more
mow one lawn or wash one car; Moe can either interested in your economic advisers’ positive
mow one lawn or wash two cars; and Curly views or their normative views? Why?
can either mow two lawns or wash one car.
a. Calculate how much of each service is pro- For further information on topics in this chapter,
duced under the following circumstances, additional problems, applications, examples, online
which we label A, B, C, and D: quizzes, and more, please visit our website at
• All three spend all their time mowing www.cengage.com/economics/mankiw.
lawns. (A)
• All three spend all their time washing
cars. (B)

Copyright 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s).
Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.