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,Click to edit Master text styles,Second level,Third level,Fourth level,Fifth level,CHAPTER 2 THINKING LIKE AN ECONOMIST,*,2,P R I N C I P L E S O F,F,O,U,R,T,H E,D,I,T,I,O,N,Thinking Like An Economist,3,Interdependence and the Gains from Trade,CHAPTER 2,THINKING LIKE AN ECONOMIST,In chapter 2,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?,CHAPTER 3,INTERDEPENDENCE AND THE GAINS FROM TRADE,In chapter 3,look for the answers to these questions:,Why do people and nations choose to be economically interdependent?,How,can trade make everyone better off?,What is absolute advantage?What is comparative advantage?How are these concepts similar?How are they different?,0,CHAPTER 2,THINKING LIKE AN ECONOMIST,The Economist as Scientist,Economists play two roles:,Scientists:try to explain the world,Policy advisors:try to improve it,In the first,economists employ the,scientific method,the dispassionate development and testing of theories about how the world works.,CHAPTER 2,THINKING LIKE AN ECONOMIST,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.,CHAPTER 2,THINKING LIKE AN ECONOMIST,Some Familiar Models,A road map,CHAPTER 2,THINKING LIKE AN ECONOMIST,Some Familiar Models,A model of human anatomy from high school biology class,CHAPTER 2,THINKING LIKE AN ECONOMIST,Some Familiar Models,A model airplane,CHAPTER 2,THINKING LIKE AN ECONOMIST,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”,CHAPTER 2,THINKING LIKE AN ECONOMIST,Factors of Production,Factors of production:,the resources the economy uses to produce goods&services,including,labor,land,capital(buildings&machines used in production),CHAPTER 2,THINKING LIKE AN ECONOMIST,FIGURE 1:,The Circular-Flow Diagram,Households,:,own the factors of production,sell/rent them to firms for income,buy and consume goods&services,Households,Firms,CHAPTER 2,THINKING LIKE AN ECONOMIST,FIGURE 1:,The Circular-Flow Diagram,Households,Firms,Firms,:,buy/hire factors of production,use them to produce goods and services,sell goods&services,CHAPTER 2,THINKING LIKE AN ECONOMIST,FIGURE 1:,The Circular-Flow Diagram,Markets for Factors of Production,Households,Firms,Income,Wages,rent,profit,Factors of production,Labor,land,capital,Spending,G&S bought,G&S sold,Revenue,Markets for Goods&Services,CHAPTER 2,THINKING LIKE AN ECONOMIST,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.,0,PPF Example,Producing one computer requires 100 hours labor.,Producing one ton of wheat requires 10 hours labor.,5,000,0,4,000,100,2,500,250,1,000,400,50,000,0,40,000,10,000,25,000,25,000,10,000,40,000,0,500,0,50,000,E,D,C,B,A,Wheat,Computers,Wheat,Computers,Production,Employment of labor hours,0,CHAPTER 2,THINKING LIKE AN ECONOMIST,Point on graph,Production,Com-,puters,Wheat,A,500,0,B,400,1,000,C,250,2,500,D,100,4,000,E,0,5,000,A,B,C,D,E,PPF Example,A,C,T,I,V,E L,E,A,R,N,I,N,G,1,:,Points off the PPF,A.,On the graph,find the point that represents(100 computers,3000 tons of wheat),label it,F,.Would it be possible for the economy to produce this combination of the two goods?Why or why not?,B.,Next,find the point that represents(300 computers,3500 tons of wheat),label it,G,.Would it be possible for the economy to produce this combination of the two goods?,16,A,C,T,I,V,E L,E,A,R,N,I,N,G,1,:,Answers,17,Point,F,:100 computers,3000 tons wheat,Point,F,requires 40,000 hours of labor.Possible but not efficient:could get more of either good w/o sacrificing any of the other.,F,A,C,T,I,V,E L,E,A,R,N,I,N,G,1,:,Answers,18,Point,G,:300 computers,3500 tons wheat,Point,G,requires 65,000 hours of labor.Not possible because economy only has 50,000 hours.,G,CHAPTER 2,THINKING LIKE AN ECONOMIST,The PPF:What We Know So Far,Points on the PPF(like,A,E,),possible,efficient:all resources are
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