Transcript MICROECONOMICS BU 224 Seminar Two

MICROECONOMICS
BU 224
Seminar
Two
Agenda








Course Issues and Questions
Models
Production Possibilities Curve
Comparative Advantage
Circular Flow
Positive and Normative Economics
Review of Questions from the Text
Homework
What is an economic
model?
A simplified description
of reality used to
understand and predict
the relationships
between variables
3
What is the purpose of
an economic model?
To forecast or predict
the results of various
changes in variables
4
What is the
scientific method?
Problem identification
 Model development
 Testing a theory

5
Identify the problem
Develop a model based
on simplified assumptions
Test the model and
formulate a conclusion
6
What conclusion can
we make?
If the evidence supports
the model, the
conclusion is to accept
the model. If not, the
model is rejected
7
What is the difference
between association and
causation?
We cannot always
assume that when one
event follows another,
the first caused the
second
8
What are resources?
The basic categories
of inputs used to
produce goods and
services
9
What are the three
categories of
resources?
Land
Labor
Capital
10
What is a
land resource?
A shorthand
expression for any
natural resource
provided by nature
11
What is labor?
The mental and physical
capacity of workers to
produce goods and
services
12
What is capital?
The physical plants,
machinery, and
equipment used to
produce other
goods, they do not
directly satisfy
human wants
13
What is
financial capital?
The money used to
purchase capital.
Financial capital by
itself is not
productive, it is a
paper claim on capital
14
What is
entrepreneurship?
Creative labor of
individuals that
enables them to seek
profits by combining
resources
15
Land
Labor
Capital
Entrepreneurship organizes
resources to produce goods
and services
16
What is a production
possibilities curve?
A curve that shows the
maximum combinations of
two outputs that an
economy can produce,
given its available
resources and technology
What is technology?
The body of knowledge
and skills applied to
how goods are
produced
What assumptions
underlie the productions
possibilities model?
Fixed resources
 Fully employed
resources
 Technology unchanged

What is
economic growth?
The ability of an
economy to produce
greater levels of output,
an outward shift of its
production possibilities
curve
Economic
growth
Technological
advance
Computers
Technological Advance
Pizzas
What is the conclusion
of the production
possibilities curve?
Scarcity limits an
economy to points on
or below its production
possibilities curve
On average, households in China save 40 percent of
their annual income each year, whereas households
in the United States save less than 5 percent.
Production possibilities are growing at roughly 9
percent annually in China and 3.5 percent in the
United States. Use graphical analysis of “present
goods” versus “future goods” to explain the
differences in growth rates
Comparative vs. absolute
advantage
Comparative advantage: the
opportunity cost of producing the good
is lower for that individual than for
other people.

Absolute advantage: if he or she
can do it better than other people.

Careful: Don’t confuse comparative
advantage with absolute advantage!

27
Comparative Advantage and Gains from Trade
Ex.: Tom and Hank
28
Tom and Hank’s Opportunity
Costs of Fish and Coconuts
One
fish
Tom’s
Opportunity
Cost
Hank’s
Opportunity
Cost
3/4 coconut
2 coconuts
One
4/3 fish
coconut
1/2 fish
Both castaways are better off when they each
specialize in what they are good at and trade.
29
Specialize and Trade
30
The Circular Flow System
RESOURCE
MARKET
•Households
sell
•Businesses buy
HOUSEHOLDS
• sell
resources
• buy
products
BUSINESSES
• buy
resources
• sell products
PRODUCT
MARKET
•Businesses sell
•Households
buy
LO5
2-31
What is
positive economics?
An analysis limited to
statements that are
verifiable
32
What is
normative economics?
An analysis based on
value judgement
33
Chapter Two Questions
9. Are the following statements true or false? Explain your answers.
a. “When people must pay higher taxes on their wage earnings, it
reduces their incentive to work” is a positive statement.
b. “We should lower taxes to encourage more work” is a positive
statement.
c. Economics cannot always be used to completely decide what society
ought to do.
d. “The system of public education in this country generates greater
benefits to society than the cost of running the system” is a normative
statement.
e. All disagreements among economists are generated by the media.
Unit Two Homework Questions
St Atanagio is a remote island in the Atlantic. The inhabitants grow corn
and breed poultry. The accompanying table shows the maximum annual
output combinations of corn and poultry that can be produced. Obviously,
given their limited resources and available technology, as they use more
of their resources for corn production, there are fewer resources available
for breeding poultry.
Maximum annual output
options
1
2
3
4
5
6
7
Quantity of Corn
(pounds)
1200
1000
800
600
400
200
0
Quantity of Poultry
(pounds)
0
300
500
600
700
775
850
a. Draw a production possibility frontier with corn on the horizontal
axis and poultry on the vertical axis illustrating these options,
showing points 1–7.
Unit Two Homework Questions
2. Can St. Atanagio produce 650 pounds of poultry and 650 pounds of
corn? Explain. Where would this point lie relative to the production
possibility frontier?
3. What is the opportunity cost of increasing the annual output of corn
from 800 to 1000 pounds?
4. What is the opportunity cost of increasing the annual output of corn
from 200 to 400 pounds?
5.Can you explain why the answers to parts 3. and 4. above are not the
same? What does this imply about the slope of the production possibility
frontier?
Microeconomics
Questions?