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Lecture 5 - CHP 2

This document provides an overview of key economic concepts covered in Chapter 2 of the textbook. It discusses: 1) The two roles of economists as scientists who develop theories and analyze data, and as policy advisors who try to improve the world. 2) How economists use models and assumptions to simplify complex realities and gain insights. It introduces the circular flow diagram and production possibilities frontier as examples of models. 3) The circular flow diagram illustrates how dollars flow between households and firms through factor and goods/services markets. It also defines factors of production. 4) The production possibilities frontier shows the tradeoffs between producing two goods given limited resources, and demonstrates the concept of opportunity cost.

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Anwar Ali
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© © All Rights Reserved
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Download as PPTX, PDF, TXT or read online on Scribd
12 views

Lecture 5 - CHP 2

This document provides an overview of key economic concepts covered in Chapter 2 of the textbook. It discusses: 1) The two roles of economists as scientists who develop theories and analyze data, and as policy advisors who try to improve the world. 2) How economists use models and assumptions to simplify complex realities and gain insights. It introduces the circular flow diagram and production possibilities frontier as examples of models. 3) The circular flow diagram illustrates how dollars flow between households and firms through factor and goods/services markets. It also defines factors of production. 4) The production possibilities frontier shows the tradeoffs between producing two goods given limited resources, and demonstrates the concept of opportunity cost.

Uploaded by

Anwar Ali
Copyright
© © All Rights Reserved
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
You are on page 1/ 13

CHAPTER

Thinking Like An Economist

Economics
PRINCIPLES OF

N. Gregory Mankiw

© 2009 South-Western, a part of Cengage Learning, all rights reserved


Highlights from previous Lecture

 Principle # 10: Society faces a short-run tradeoff between


inflation and unemployment

TEN PRINCIPLES OF ECONOMICS 2


In this chapter,
look for the answers to these questions:
 What are economists’ two roles? How do they differ?
 What are models? How do economists use them?
 What are the elements of the Circular-Flow Diagram?
What concepts does the diagram illustrate?
 How is the Production Possibilities Frontier related
to opportunity cost? What other concepts does it
illustrate?
 What is the difference between microeconomics and
macroeconomics? Between positive and normative?
3
The Economist as Scientist

 Economists play two roles:


1. Scientists: try to explain the world
2. Policy Advisors: try to improve it

 In the first, economists devise theories, collect


data, and then analyze these data in an
attempt to verify or refute their theories.

THINKING LIKE AN ECONOMIST 4


Assumptions & Models
 Assumptions simplify the complex world,
make it easier to understand.
 Example: To study international trade,
assume two countries and two goods.
Unrealistic, but simple to learn and
gives useful insights about the real world.

 Model: a highly simplified representation of


a more complicated reality.
Economists use models to study economic issues.
 Simplify reality to improve understanding

THINKING LIKE AN ECONOMIST 5


Our First Model:
The Circular-Flow Diagram
 The Circular-Flow Diagram: a visual model of
the economy, shows how dollars flow through
markets among households and firms
 Two types of “actors”:
 households
 firms
 Two markets:
 the market for goods and services
 the market for “factors of production”

THINKING LIKE AN ECONOMIST 6


Factors of Production
 Factors of production: the resources the
economy uses to produce goods & services,
including
 labor
 land
 capital (buildings & machines used in
production)

THINKING LIKE AN ECONOMIST 7


FIGURE 1: The Circular-Flow Diagram

Households:
Households:
 Own
Own thethe 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 goods
goods & & services
services

Firms Households

Firms:
Firms:
 Buy/hire
Buy/hire factors
factors of
of production,
production,

use
use them
them to to produce
produce goods
goods
and
and services
services
THINKING
 Sell
Sell goods
LIKE AN&
goods services
&ECONOMIST
services 8
FIGURE 1: The Circular-Flow Diagram

Revenue Spending
Markets for
G&S Goods &
G&S
sold Services bought

Firms Households

Factors of Labor, land,


production Markets for capital
Factors of
Wages, rent, Production Income
profit
THINKING LIKE AN ECONOMIST 9
Our Second Model:
The Production Possibilities Frontier
 The Production Possibilities Frontier (PPF):
a graph that shows the combinations of
two goods the economy can possibly produce
given the available resources and the available
technology
 Example:
 Two goods: computers and wheat
 One resource: labor (measured in hours)
 Economy has 50,000 labor hours per month
available for production.
THINKING LIKE AN ECONOMIST 10
PPF Example
 Producing one computer requires 100 hours labor.
 Producing one ton of wheat requires 10 hours labor.
Employment of
Production
labor hours
Computers Wheat Computers Wheat
A 50,000 0 500 0
B 40,000 10,000 400 1,000
C 25,000 25,000 250 2,500
D 10,000 40,000 100 4,000
E 0 50,000 0 5,000
PPF Example
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

THINKING LIKE AN ECONOMIST 12


End
End of
of
Lecture
Lecture 55

TEN PRINCIPLES OF ECONOMICS 13

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