Professional Documents
Culture Documents
Reading
• Mankiw, Chapter 1 & 2
1
Scarcity
Human wants are unlimited, but resources
are not, and therefore our society cannot
produce all the goods and services we wish
to have.
2
Scarcity
Choice Competition
3
Economics
4
Microeconomics
The study of how households and firms make
decisions and how they interact in markets
Macroeconomics
5
The Economist as a Scientist
Economists:
- make use of scientific method to think analytically and
objectivity.
- through observation, develop theories to explain how a
complex, real world operates.
- built models based on their theories.
- test their models and theories by collecting and
analyzing real world data.
- make assumptions in their models to simplify the
complex world and make it easier to understand.
6
Economic Models
Two of the most basic economic models include:
7
The Circular-Flow Model
8
The Circular-Flow Diagram
Revenue Spending
Market for
Goods
Goods & Goods &
Services sold and Services
Services
bought
Firms
Households
Factors of Production
- Inputs used to produce goods and
services
- Land, labor, and capital
10
The Circular-Flow Diagram
Firms
- Produce and sell goods and services
- Hire and use factors of production (i.e. labor,
land and capital (buildings and machines))
Households
- Buy and consume goods and services
- Own and sell factors of production
11
The Circular-Flow Diagram
13
The Production Possibilities Frontier
Quantity of
Quantity of computers the economy could possibly produce by
Computers
using all the available factors of production and technology
Produced
3,000 Production Possibilities Frontier
of an economy produces only two goods
– cars and computers
14 of
Quantity
0 1,000
Cars Produced
The Production Possibilities Frontier
Quantity of
Computers
Produced
3,000 D
2,200
C
2,000 A
Production
possibilities
frontier
B
1,000
15 of
Quantity
0 300 600 700 1,000
Cars Produced
Concepts Illustrated by the Production
Possibilities Frontier
[Productive] Efficiency (point B vs. point A:
A represents efficient level of production.
B is inefficient in production – factors of
production and/or technology have not been
fully utilized
Tradeoffs (pt. A [more cars but less PCs]
vs. pt. C [more PCs but less cars])
Pt. D is not attainable giving the available
factors of production and technology
16
Concepts Illustrated by the Production
Possibilities Frontier
Quantity of Increasing Opportunity Cost
Computers
Produced [represented by the slope of
3,000 PPF: bowed outwards /
concave to origin]. i.e. if the
economy wants to have an
additional unit of car, the
economy would need to give
up more and more computers.
17 of
Quantity
0 1,000
Cars Produced
Concepts Illustrated by the
Production Possibilities Frontier
Quantity of Economic Growth
Computers
Produced [represented by shifting
3,000 the PPF curve
outwards]. i.e. if the
economy obtains more
factors of production
and/or increase its level
of technology
18 of
Quantity
0 1,000
Cars Produced
Two Roles of Economists
19
Positive versus Normative Analysis
- As scientists, economists make Positive statements.
Positive statements are descriptive. They are making a
claim about how the world works.
21
Ten Principles of Economics
How People Make Decisions
Inflation Unemployment
45