《西方經(jīng)濟學(xué)》雙語課件ch02-Thinking-Like-An-Economist

ThinkingLikeAnEconomist2PRINCIPLESOFF

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NThinkingLikeAnEconomist2PRInthischapter,lookfortheanswerstothesequestions:Whatareeconomists’tworoles?Howdotheydiffer?Whataremodels?Howdoeconomistsusemodels?WhataretheelementsoftheCircular-FlowDiagram?Whatconceptsdoesthisdiagramillustrate?HowistheProductionPossibilitiesFrontierrelated

toopportunitycost?Whatotherconceptsdoesitillustrate?Whatisthedifferencebetweenmicroeconomicsandmacroeconomics?Betweenpositiveandnormative?CHAPTER2THINKINGLIKEANECONOMISTInthischapter,lookfortheTheEconomistasScientistEconomistsplaytworoles:Scientists:trytoexplaintheworldPolicyadvisors:trytoimproveitInthefirstrole,economistsemploythescientificmethod:thedispassionatedevelopmentandtestingoftheoriesabout

howtheworldworks.CHAPTER2THINKINGLIKEANECONOMISTTheEconomistasScientistEconAssumptions&ModelsAssumptionssimplifythecomplexworld,

makeiteasiertounderstand.Example:Whenstudyinginternationaltrade,

wemightassumetheworldconsistsof

twocountriesandtwogoods. Veryunrealistic,butsimplifiestheproblem

andyieldsusefulinsightsaboutthemorecomplicatedrealworld.Economistsusemodelstostudyeconomicissues.Amodelisahighlysimplifiedrepresentationofamorecomplicatedreality.CHAPTER2THINKINGLIKEANECONOMISTAssumptions&ModelsAssumptionSomeFamiliarModelsAroadmapCHAPTER2THINKINGLIKEANECONOMISTSomeFamiliarModelsAroadmapSomeFamiliarModelsAmodelofhuman

anatomyfromhigh

schoolbiologyclassCHAPTER2THINKINGLIKEANECONOMISTSomeFamiliarModelsAmodelofSomeFamiliarModelsAmodelairplaneCHAPTER2THINKINGLIKEANECONOMISTSomeFamiliarModelsAmodelaiSomeFamiliarModelsThemodelteethatthedentist’sofficeDon’tforgettofloss!CHAPTER2THINKINGLIKEANECONOMISTSomeFamiliarModelsThemodelOurFirstModel:

TheCircular-FlowDiagramTheCircular-FlowDiagram:Avisualmodeloftheeconomy,showshowdollarsflowthroughmarketsamonghouseholdsandfirms.Includestwotypesof“actors”:householdsfirmsIncludestwomarkets:themarketforgoodsandservicesthemarketfor“factorsofproduction”CHAPTER2THINKINGLIKEANECONOMISTOurFirstModel:

TheCirculFactorsofProductionThefactorsofproductionaretheresourcesthattheeconomyusestoproducegoods&services.Theyinclude:laborlandcapital(buildings&machinesusedinproduction)CHAPTER2THINKINGLIKEANECONOMISTFactorsofProductionThefactoFIGURE1:TheCircular-FlowDiagramHouseholds:ownthefactorsofproduction,

sell/rentthemtofirmsforincomebuyandconsumegoods&servicesHouseholdsFirmsCHAPTER2THINKINGLIKEANECONOMISTFIGURE1:TheCircular-FlowFIGURE1:TheCircular-FlowDiagramHouseholdsFirmsFirms:buy/hirefactorsofproduction,

usethemtoproducegoodsandservicessellgoods&servicesCHAPTER2THINKINGLIKEANECONOMISTFIGURE1:TheCircular-FlowFIGURE1:TheCircular-FlowDiagramMarketsforFactorsofProductionHouseholdsFirmsIncomeWages,rent,profitFactorsofproductionLabor,land,capitalSpendingG&SboughtG&SsoldRevenueMarketsforGoods&ServicesCHAPTER2THINKINGLIKEANECONOMISTFIGURE1:TheCircular-FlowOurSecondModel:

TheProductionPossibilitiesFrontierTheProductionPossibilitiesFrontier(PPF):

Agraphthatshowsthecombinationsof

twogoodstheeconomycanpossiblyproducegiventheavailableresourcesandtheavailabletechnology.Example:Twogoods:computersandwheatOneresource:labor(measuredinhours)Economyhas50,000laborhourspermonthavailableforproduction.0CHAPTER2THINKINGLIKEANECONOMISTOurSecondModel:

TheProduPPFExampleProducingonecomputerrequires100hourslabor.Producingonetonofwheatrequires10hourslabor.5,00004,0001002,5002501,00040050,000040,00010,00025,00025,00010,00040,0000500050,000EDCBAWheatComputersWheatComputersProductionEmploymentof

laborhours0CHAPTER2THINKINGLIKEANECONOMISTPPFExampleProducingonecompuPointongraphProductionCom-putersWheatA5000B4001,000C2502,500D1004,000E05,000ABCDEPPFExampleCHAPTER2THINKINGLIKEANECONOMISTPointongraphProductionCom-puA

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PointsonthePPFA. Onthegraph,findthepointthatrepresents

(100computers,3000tonsofwheat),labelitF.

Woulditbepossiblefortheeconomytoproducethiscombinationofthetwogoods?

Whyorwhynot?B. Next,findthepointthatrepresents

(300computers,3500tonsofwheat),labelitG.Woulditbepossiblefortheeconomytoproducethiscombinationofthetwogoods?16CHAPTER2THINKINGLIKEANECONOMISTACTIVELEARNINGA

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Answers17PointF:

100computers,3000tonswheatPointFrequires40,000hours

oflabor.

Possiblebut

notefficient:couldgetmore

ofeithergood

w/osacrificinganyoftheother.FCHAPTER2THINKINGLIKEANECONOMISTACTIVELEARNINGA

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Answers18PointG:

300computers,3500tonswheatPointGrequires65,000hours

oflabor.

Notpossiblebecauseeconomy

onlyhas

50,000hours.GCHAPTER2THINKINGLIKEANECONOMISTACTIVELEARNINGThePPF:WhatWeKnowSoFarPointsonthePPF(likeA–E)possibleefficient:allresourcesarefullyutilizedPointsunderthePPF(likeF)possiblenotefficient:someresourcesunderutilized

(e.g.,workersunemployed,factoriesidle)PointsabovethePPF(likeG)notpossibleCHAPTER2THINKINGLIKEANECONOMISTThePPF:WhatWeKnowSoFarPThePPFandOpportunityCostRecall:Theopportunitycostofanitem

iswhatmustbegivenuptoobtainthatitem.MovingalongaPPFinvolvesshiftingresources(e.g.,labor)fromtheproductionofonegoodtotheother.Societyfacesatradeoff:Gettingmoreofonegoodrequiressacrificingsomeoftheother.TheslopeofthePPFtellsyoutheopportunitycostofonegoodintermsoftheother.CHAPTER2THINKINGLIKEANECONOMISTThePPFandOpportunityCostReThePPFandOpportunityCostTheslopeofalineequalsthe“riseovertherun”–

theamountthelineriseswhenyoumovetotherightbyoneunit.–1000100slope==–10Here,theopportunitycostofacomputeris

10tonsofwheat.CHAPTER2THINKINGLIKEANECONOMISTThePPFandOpportunityCostThA

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PPFandOpportunityCost22Inwhichcountryistheopportunitycostofclothlower?FRANCEENGLANDCHAPTER2THINKINGLIKEANECONOMISTACTIVELEARNINGA

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Answers23England,becauseitsPPFisnotassteepasFrance’s.FRANCEENGLANDCHAPTER2THINKINGLIKEANECONOMISTACTIVELEARNINGEconomicGrowthandthePPFWithadditionalresourcesoranimprovementintechnology,

theeconomycanproducemorecomputers,morewheat,oranycombinationinbetween.EconomicgrowthshiftsthePPFoutward.CHAPTER2THINKINGLIKEANECONOMISTEconomicGrowthandthePPFWitTheShapeofthePPFThePPFcouldbeastraightline,orbow-shapedDependsonwhathappenstoopportunitycost

aseconomyshiftsresourcesfromoneindustry

totheother.Ifopp.costremainsconstant,

PPFisastraightline. (Inthepreviousexample,opp.costofacomputerwasalways10tonsofwheat.)Ifopp.costofagoodrisesastheeconomyproducesmoreofthegood,PPFisbow-shaped.CHAPTER2THINKINGLIKEANECONOMISTTheShapeofthePPFThePPFcoWhythePPFMightBeBow-ShapedMountainBikesBeerAstheeconomyshiftsresources

frombeertomountainbikes:PPFbecomessteeperopp.costofmountainbikesincreasesCHAPTER2THINKINGLIKEANECONOMISTWhythePPFMightBeBow-ShapeAWhythePPFMightBeBow-ShapedAtpointA,

mostworkersare

producingbeer,

eventhosethat

arebettersuited

tobuilding

mountainbikes.So,donothaveto

giveupmuchbeertogetmorebikes.MountainBikesBeerAtA,opp.costofmtnbikesislow.CHAPTER2THINKINGLIKEANECONOMISTAWhythePPFMightBeBow-ShapBWhythePPFMightBeBow-ShapedAtB,mostworkersareproducingbikes.

Thefewleftinbeerarethebestbrewers.Producingmorebikeswouldrequireshiftingsomeofthebestbrewersawayfrombeerproduction,

wouldcauseabigdropinbeeroutput.MountainBikesBeerAtB,opp.costofmtnbikes

ishigh.CHAPTER2THINKINGLIKEANECONOMISTBWhythePPFMightBeBow-ShapWhythePPFMightBeBow-ShapedSo,PPFisbow-shapedwhendifferentworkershavedifferentskills,differentopportunitycostsofproducingonegoodintermsoftheother.ThePPFwouldalsobebow-shapedwhenthereissomeotherresource,ormixofresourceswithvaryingopportunitycosts.E.g.,differenttypesoflandsuitedfor

differentusesCHAPTER2THINKINGLIKEANECONOMISTWhythePPFMightBeBow-ShapeThePPF:ASummaryThePPFshowsallcombinationsoftwogoodsthataneconomycanpossiblyproduce,

givenitsresourcesandtechnology.ThePPFillustratestheconcepts

oftradeoffandopportunitycost,

efficiencyandinefficiency,

unemployment,andeconomicgrowth.Abow-shapedPPFillustratestheconceptofincreasingopportunitycost.CHAPTER2THINKINGLIKEANECONOMISTThePPF:ASummaryThePPFshoMicroeconomicsandMacroeconomicsMicroeconomicsisthestudyofhowhouseholdsandfirmsmakedecisions

andhowtheyinteractinmarkets.Macroeconomicsisthestudyofeconomy-widephenomena,includinginflation,unemployment,andeconomicgrowth.Thesetwobranchesofeconomicsarecloselyintertwined,yetdistinct:theyaddressdifferentquestions.CHAPTER2THINKINGLIKEANECONOMISTMicroeconomicsandMacroeconomTheEconomistasPolicyAdvisorAsscientists,economistsmake

positivestatements,

whichattempttodescribetheworldasitis.Aspolicyadvisors,economistsmake

normativestatements,

whichattempttoprescribehowtheworldshouldbe.Positivestatementscanbeconfirmedorrefuted,

normativestatementscannot.Govtemploysmanyeconomistsforpolicyadvice.E.g.,theU.S.PresidenthasaCouncilofEconomicAdvisors,whichtheauthorofthistextbookrecentlychaired.CHAPTER2THINKINGLIKEANECONOMISTTheEconomistasPolicyAdvisoA

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Identifyingpositivevs.normativeWhichofthesestatementsare“positive”andwhichare“normative”?Howcanyoutellthedifference?a. Pricesrisewhenthegovernmentincreasesthequantityofmoney.b. Thegovernmentshouldprintlessmoney.c. Ataxcutisneededtostimulatetheeconomy.d. Anincreaseinthepriceofgasolinewillcauseanincreaseinconsumerdemandforvideorentals.33CHAPTER2THINKINGLIKEANECONOMISTACTIVELEARNINGA

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Answersa. Pricesrisewhenthegovernmentincreasesthequantityofmoney. Positive,describesarelationship,couldusedatatoconfirmorrefute.b. Thegovernmentshouldprintlessmoney.

Normative,thisisavaluejudgment,cannotbeconfirmedorrefuted.34CHAPTER2THINKINGLIKEANECONOMISTACTIVELEARNINGA

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Answersc. Ataxcutisneededtostimulatetheeconomy. Normative,anothervaluejudgment.d. Anincreaseinthepriceofgasolinewillcauseanincreaseinconsumerdemandforvideorentals. Positive,describesarelationship.

Notethatastatementneednotbetruetobepositive.35CHAPTER2THINKINGLIKEANECONOMISTACTIVELEARNINGWhyEconomistsDisagreeEconomistsoftengiveconflictingpolicyadvice.Theysometimesdisagreeaboutthevalidityofalternativepositivetheoriesabouttheworld.Theymayhavedifferentvaluesand,therefore,differentnormativeviewsaboutwhatpolicyshouldtrytoaccomplish.Yet,therearemanypropositionsaboutwhichmosteconomistsagree.CHAPTER2THINKINGLIKEANECONOMISTWhyEconomistsDisagreeEconomiPropositionsaboutWhichMost

EconomistsAgree(and%agreeing)Aceilingonrentsreducesthequantityandqualityofhousingavailable.(93%)Tariffsandimportquotasusuallyreducegeneraleconomicwelfare.(93%)Alargefederalbudgetdeficithasanadverseeffectontheeconomy.(83%)Aminimumwageincreasesunemploymentamongyoungandunskilledworkers.(79%)Effluenttaxesandmarketablepollutionpermitsrepresentabetterapproachtopollutioncontrolthanimpositionofpollutionceilings.(78%)CHAPTER2THINKINGLIKEANECONOMISTPropositionsaboutWhichMostFYI:WhoStudiesEconomics?RonaldReagan,PresidentoftheUnitedStatesBarbaraBoxer,U.S.SenatorSandraDay-O’Connor,SupremeCourtJusticeAnthonyZinni,General,U.S.MarineCorpsKofiAnnan,SecretaryGeneral,UnitedNationsMegWitman,ChiefExecutiveOfficer,eBaySteveBallmer,ChiefExecutiveOfficer,MicrosoftJohnElway,NFLQuarterbackTigerWoods,GolferBenStein,PoliticalSpeechwriter,Actor,GameShowHostArnoldSchwarzenegger,GovernorofCalifornia,ActorMickJagger,SingerfortheRollingStonesCHAPTER2THINKINGLIKEANECONOMISTFYI:WhoStudiesEconomics?RoCHAPTERSUMMARYAsscientists,economiststrytoexplaintheworldusingmodelswithappropriateassumptions.TwosimplemodelsaretheCircular-FlowDiagramandtheProductionPossibilitiesFrontier.Microeconomicsstudiesthebehaviorofconsumersandfirms,andtheirinteractionsinmarkets.Macroeconomicsstudiestheeconomyasawhole.Aspolicyadvisers,economistsofferadviceonhowtoimprovetheworld.CHAPTER2THINKINGLIKEANECONOMISTCHAPTERSUMMARYAsscientists,ThinkingLikeAnEconomist2PRINCIPLESOFF

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NThinkingLikeAnEconomist2PRInthischapter,lookfortheanswerstothesequestions:Whatareeconomists’tworoles?Howdotheydiffer?Whataremodels?Howdoeconomistsusemodels?WhataretheelementsoftheCircular-FlowDiagram?Whatconceptsdoesthisdiagramillustrate?HowistheProductionPossibilitiesFrontierrelated

toopportunitycost?Whatotherconceptsdoesitillustrate?Whatisthedifferencebetweenmicroeconomicsandmacroeconomics?Betweenpositiveandnormative?CHAPTER2THINKINGLIKEANECONOMISTInthischapter,lookfortheTheEconomistasScientistEconomistsplaytworoles:Scientists:trytoexplaintheworldPolicyadvisors:trytoimproveitInthefirstrole,economistsemploythescientificmethod:thedispassionatedevelopmentandtestingoftheoriesabout

howtheworldworks.CHAPTER2THINKINGLIKEANECONOMISTTheEconomistasScientistEconAssumptions&ModelsAssumptionssimplifythecomplexworld,

makeiteasiertounderstand.Example:Whenstudyinginternationaltrade,

wemightassumetheworldconsistsof

twocountriesandtwogoods. Veryunrealistic,butsimplifiestheproblem

andyieldsusefulinsightsaboutthemorecomplicatedrealworld.Economistsusemodelstostudyeconomicissues.Amodelisahighlysimplifiedrepresentationofamorecomplicatedreality.CHAPTER2THINKINGLIKEANECONOMISTAssumptions&ModelsAssumptionSomeFamiliarModelsAroadmapCHAPTER2THINKINGLIKEANECONOMISTSomeFamiliarModelsAroadmapSomeFamiliarModelsAmodelofhuman

anatomyfromhigh

schoolbiologyclassCHAPTER2THINKINGLIKEANECONOMISTSomeFamiliarModelsAmodelofSomeFamiliarModelsAmodelairplaneCHAPTER2THINKINGLIKEANECONOMISTSomeFamiliarModelsAmodelaiSomeFamiliarModelsThemodelteethatthedentist’sofficeDon’tforgettofloss!CHAPTER2THINKINGLIKEANECONOMISTSomeFamiliarModelsThemodelOurFirstModel:

TheCircular-FlowDiagramTheCircular-FlowDiagram:Avisualmodeloftheeconomy,showshowdollarsflowthroughmarketsamonghouseholdsandfirms.Includestwotypesof“actors”:householdsfirmsIncludestwomarkets:themarketforgoodsandservicesthemarketfor“factorsofproduction”CHAPTER2THINKINGLIKEANECONOMISTOurFirstModel:

TheCirculFactorsofProductionThefactorsofproductionaretheresourcesthattheeconomyusestoproducegoods&services.Theyinclude:laborlandcapital(buildings&machinesusedinproduction)CHAPTER2THINKINGLIKEANECONOMISTFactorsofProductionThefactoFIGURE1:TheCircular-FlowDiagramHouseholds:ownthefactorsofproduction,

sell/rentthemtofirmsforincomebuyandconsumegoods&servicesHouseholdsFirmsCHAPTER2THINKINGLIKEANECONOMISTFIGURE1:TheCircular-FlowFIGURE1:TheCircular-FlowDiagramHouseholdsFirmsFirms:buy/hirefactorsofproduction,

usethemtoproducegoodsandservicessellgoods&servicesCHAPTER2THINKINGLIKEANECONOMISTFIGURE1:TheCircular-FlowFIGURE1:TheCircular-FlowDiagramMarketsforFactorsofProductionHouseholdsFirmsIncomeWages,rent,profitFactorsofproductionLabor,land,capitalSpendingG&SboughtG&SsoldRevenueMarketsforGoods&ServicesCHAPTER2THINKINGLIKEANECONOMISTFIGURE1:TheCircular-FlowOurSecondModel:

TheProductionPossibilitiesFrontierTheProductionPossibilitiesFrontier(PPF):

Agraphthatshowsthecombinationsof

twogoodstheeconomycanpossiblyproducegiventheavailableresourcesandtheavailabletechnology.Example:Twogoods:computersandwheatOneresource:labor(measuredinhours)Economyhas50,000laborhourspermonthavailableforproduction.0CHAPTER2THINKINGLIKEANECONOMISTOurSecondModel:

TheProduPPFExampleProducingonecomputerrequires100hourslabor.Producingonetonofwheatrequires10hourslabor.5,00004,0001002,5002501,00040050,000040,00010,00025,00025,00010,00040,0000500050,000EDCBAWheatComputersWheatComputersProductionEmploymentof

laborhours0CHAPTER2THINKINGLIKEANECONOMISTPPFExampleProducingonecompuPointongraphProductionCom-putersWheatA5000B4001,000C2502,500D1004,000E05,000ABCDEPPFExampleCHAPTER2THINKINGLIKEANECONOMISTPointongraphProductionCom-puA

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PointsonthePPFA. Onthegraph,findthepointthatrepresents

(100computers,3000tonsofwheat),labelitF.

Woulditbepossiblefortheeconomytoproducethiscombinationofthetwogoods?

Whyorwhynot?B. Next,findthepointthatrepresents

(300computers,3500tonsofwheat),labelitG.Woulditbepossiblefortheeconomytoproducethiscombinationofthetwogoods?56CHAPTER2THINKINGLIKEANECONOMISTACTIVELEARNINGA

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Answers57PointF:

100computers,3000tonswheatPointFrequires40,000hours

oflabor.

Possiblebut

notefficient:couldgetmore

ofeithergood

w/osacrificinganyoftheother.FCHAPTER2THINKINGLIKEANECONOMISTACTIVELEARNINGA

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Answers58PointG:

300computers,3500tonswheatPointGrequires65,000hours

oflabor.

Notpossiblebecauseeconomy

onlyhas

50,000hours.GCHAPTER2THINKINGLIKEANECONOMISTACTIVELEARNINGThePPF:WhatWeKnowSoFarPointsonthePPF(likeA–E)possibleefficient:allresourcesarefullyutilizedPointsunderthePPF(likeF)possiblenotefficient:someresourcesunderutilized

(e.g.,workersunemployed,factoriesidle)PointsabovethePPF(likeG)notpossibleCHAPTER2THINKINGLIKEANECONOMISTThePPF:WhatWeKnowSoFarPThePPFandOpportunityCostRecall:Theopportunitycostofanitem

iswhatmustbegivenuptoobtainthatitem.MovingalongaPPFinvolvesshiftingresources(e.g.,labor)fromtheproductionofonegoodtotheother.Societyfacesatradeoff:Gettingmoreofonegoodrequiressacrificingsomeoftheother.TheslopeofthePPFtellsyoutheopportunitycostofonegoodintermsoftheother.CHAPTER2THINKINGLIKEANECONOMISTThePPFandOpportunityCostReThePPFandOpportunityCostTheslopeofalineequalsthe“riseovertherun”–

theamountthelineriseswhenyoumovetotherightbyoneunit.–1000100slope==–10Here,theopportunitycostofacomputeris

10tonsofwheat.CHAPTER2THINKINGLIKEANECONOMISTThePPFandOpportunityCostThA

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PPFandOpportunityCost62Inwhichcountryistheopportunitycostofclothlower?FRANCEENGLANDCHAPTER2THINKINGLIKEANECONOMISTACTIVELEARNINGA

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Answers63England,becauseitsPPFisnotassteepasFrance’s.FRANCEENGLANDCHAPTER2THINKINGLIKEANECONOMISTACTIVELEARNINGEconomicGrowthandthePPFWithadditionalresourcesoranimprovementintechnology,

theeconomycanproducemorecomputers,morewheat,oranycombinationinbetween.EconomicgrowthshiftsthePPFoutward.CHAPTER2THINKINGLIKEANECONOMISTEconomicGrowthandthePPFWitTheShapeofthePPFThePPFcouldbeastraightline,orbow-shapedDependsonwhathappenstoopportunitycost

aseconomyshiftsresourcesfromoneindustry

totheother.Ifopp.costremainsconstant,

PPFisastraightline. (Inthepreviousexample,opp.costofacomputerwasalways10tonsofwheat.)Ifopp.costofagoodrisesastheeconomyproducesmoreofthegood,PPFisbow-shaped.CHAPTER2THINKINGLIKEANECONOMISTTheShapeofthePPFThePPFcoWhythePPFMightBeBow-ShapedMountainBikesBeerAstheeconomyshiftsresources

frombeertomountainbikes:PPFbecomessteeperopp.costofmountainbikesincreasesCHAPTER2THINKINGLIKEANECONOMISTWhythePPFMightBeBow-ShapeAWhythePPFMightBeBow-ShapedAtpointA,

mostworkersare

producingbeer,

eventhosethat

arebettersuited

tobuilding

mountainbikes.So,donothaveto

giveupmuchbeertogetmorebikes.MountainBikesBeerAtA,opp.costofmtnbikesislow.CHAPTER2THINKINGLIKEANECONOMISTAWhythePPFMightBeBow-ShapBWhythePPFMightBeBow-ShapedAtB,mostworkersareproducingbikes.

Thefewleftinbeerarethebestbrewers.Producingmorebikeswouldrequireshiftingsomeofthebestbrewersawayfrombeerproduction,

wouldcauseabigdropinbeeroutput.MountainBikesBeerAtB,opp.costofmtnbikes

ishigh.CHAPTER2THINKINGLIKEANECONOMISTBWhythePPFMightBeBow-ShapWhythePPFMightBeBow-ShapedSo,PPFisbow-shapedwhendifferentworkershavedifferentskills,differentopportunitycostsofproducingonegoodintermsoftheother.ThePPFwouldalsobebow-shapedwhenthereissomeotherresource,ormixofresourceswithvaryingopportunitycosts.E.g.,differenttypesoflandsuitedfor

differentusesCHAPTER2THINKINGLIKEANECONOMISTWhythePPFMightBeBow-ShapeThePPF:ASummaryThePPFshowsallcombinationsoftwogoodsthataneconomycanpossiblyproduce,

givenitsresourcesandtechnology.ThePPFillustratestheconcepts

oftradeoffandopportunitycost,

efficiencyandinefficiency,

unemployment,andeconomicgrowth.Abow-shapedPPFillustratestheconceptofincreasingopportunitycost.CHAPTER2THINKINGLIKEANECONOMISTThePPF:ASummaryThePPFshoMicroeconomicsandMacroeconomicsMicroeconomicsisthestudyofhowhouseholdsandfirmsmakedecisions

andhowtheyinteractinmarkets.Macroeconomicsisthestudyofeconomy-widephenomena,includinginflation,unemployment,andeconomicgrowth.Thesetwobranchesofeconomicsarecloselyintertwined,yetdistinct:theyaddressdifferentquestions.CHAPTER2THINKINGLIKEANECONOMISTMicroeconomicsandMacroeconomTheEconomistasPolicyAdvisorAsscientists,economistsmake

positivestatements,

whichattempttodescribetheworldasitis.Aspolicyadvisors,economistsmake

normativestatements,

whichattempttoprescribehowtheworldshouldbe.Positivestatementscanbeconfirmedorrefuted,

normativestatementscannot.Govtemploysmanyeconomistsforpolicyadvice.E.g.,theU.S.PresidenthasaCouncilofEconomicAdvisors,whichtheauthorofthistextbookrecentlychaired.CHAPTER2THINKINGLIKEANECONOMISTTheEconomistasPolicyAdvisoA

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Identifyingpositivevs.normativeWhichofthesestatementsare“positive”andwhichare“normative”?Howcanyoutellthedifference?a. Pricesrisewhenthegovernmentincreasesthequantityofmoney.b. Thegovernmentshouldprintlessmoney.c. Ataxcutisneededtostimulatetheeconomy.d. Anincreaseinthepriceofgasolinewillcauseanincreaseinconsumerdemandforvideorentals.73CHAPTER2THINKINGLIKEANECONOMISTACTIVELEARNINGA

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Answersa.