production possibilities frontier

Module 1 - Section B – Chapter 2 - PPT

 Circular Flow Model  Production Possibilities

a. Scarsity and Opportunity Cost b. Resources

Copyright © 2015, Shakira Johnson - UTSA

Read Questions to Answer:

 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?

Policy advisors and scientists Economist Roles

Familiar Models

A road map Model airplane

Circular Flow Model

The Circular-Flow Diagram is a visual model of the economy, shows how dollars flow through markets among households and firms

PPF Curve

A graph that shows the combinations of two goods the economy can possibly

produce given the available resources and the available technology

PPF Curve

PPF Curve

C a

p it

a l

g o

o d

s

Consumer goods

PPF Curve

Assumptions and Models

• Economics uses: – Assumptions which simplify the complex

world and make it easier to understand. • Example: To study international trade,

assume two countries and two goods. (Unrealistic but simple)

• Ceteris Paribus : Other things constant – Simple models to study economic issues

and give useful insights about the real world.

ECONOMICS

MICRO

Micro is a prefix from the Greek word μικρός meaning small.

Microeconomics: focuses on the economic choices of individual actors (people, firms).

MACRO

Macro is the prefix meaning large, from the similar Greek word μάκρος, which means 'long'.

Macroeconomics: focuses on aggregate

Policy Advisor

 As policy advisors, economists make normative statements, which attempt to prescribe how the world should be.

 As scientists, economists make positive statements, which attempt to describe the world as it is. can be confirmed or refuted, normative statements cannot.

 Govt employs many economists for policy advice. E.g., the U.S. President has a Council of Economic Advisors, which the author of this textbook chaired from 2003 to 2005.

Why do Economists Disagree?

Economists often give conflicting policy advice.

They sometimes disagree about the validity of alternative positive theories about the world.

They may have different values and, therefore, different normative views about what policy should try to accomplish.

Yet, there are many propositions

about which most economists agree.

Propositions about Which Most Economists Agree (and % who agree)

 A ceiling on rents reduces the quantity and quality of housing available. (93%)

 Tariffs and import quotas usually reduce general economic welfare. (93%)

 The United States should not restrict employers from outsourcing work to foreign countries. (90%)

 The United States should eliminate agriculture subsidies. (85%)

 The gap between Social Security funds and expenditures will become unsustainably large within the next fifty years if current policies remain unchanged. (85%)

 A large federal budget deficit has an adverse effect on the economy. (83%)

 A minimum wage increases unemployment among young and unskilled workers. (79%)

 Effluent taxes and marketable pollution permits represent a better approach to pollution control than imposition of pollution ceilings. (78%)