Principles of Economics Chapter 2 PDF

8.10.2023 N. GREGORY MANKIW PRINCIPLES OF ECONOMICS Eighth Edition CHAPTER...

8.10.2023 N. GREGORY MANKIW PRINCIPLES OF ECONOMICS Eighth Edition CHAPTER Thinking Like an Economist Premium PowerPoint Slides by: V. Andreea CHIRITESCU Eastern Illinois University © 2018 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning 1 management system for classroom use. 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? © 2018 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning 2 management system for classroom use. 1  8.10.2023 The Economist as a Scientist Economists play two roles: 1. Scientists: try to explain the world 2. Policy advisors: try to improve it As scientists, economists employ the scientific method – Dispassionate development and testing of theories about how the world works © 2018 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning 3 management system for classroom use. The Economist as a Scientist Assumptions – Simplify the complex world and make it easier to understand – Example: to study international trade, assume two countries and two goods Economists use models to study economic issues – Highly simplified representation of a more complicated reality © 2018 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning 4 management system for classroom use. 2  8.10.2023 The Economist as a Scientist Examples of models: – The model teeth at the dentist’s office – A model of human anatomy from high school biology class Don’t forget to floss! – A road map ©ittipon/Shutterstock.com ©wavebreakmedia/Shutterstock.com ©Accord/Shutterstock.com © 2018 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning 5 management system for classroom use. The Economist as a Scientist Circular-flow diagram – Visual model of the economy – Shows how dollars flow through markets among households and firms Two decision makers – Firms and Households Interacting in two markets – Market for gods and services – Market for factors of production (inputs) © 2018 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning 6 management system for classroom use. 3  8.10.2023 Figure 1 The circular flow Households:  Own the factors of production, sell/rent them to firms for income  Buy and consume goods & services Households Firms Firms:  Buy/hire factors of production, use them to produce goods and services  Sell goods & services © 2018 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning 7 management system for classroom use. Figure 1 The circular flow Revenue Spending Markets for G&S Goods & G&S sold Services bought Firms Households Factors of Labor, land, production Markets for capital Factors of Wages, rent, Production Income profit © 2018 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning 8 management system for classroom use. 4  8.10.2023 The PPF Production possibilities frontier – A graph: combinations of output that the economy can possibly produce – Given the available Factors of production and technology – Example: Two goods: computers and wheat One resource: labor (measured in hours) Economy has 50,000 labor hours per month available for production © 2018 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning 9 management system for classroom use. PPF Example Producing one computer requires 100 hours labor. Producing one ton of wheat requires 10 hours labor. Employment of Production labor hours Computers Wheat Computers Wheat A 50,000 0 500 0 B 40,000 10,000 400 1,000 C 25,000 25,000 250 2,500 D 10,000 40,000 100 4,000 E 0 50,000 0 5,000 © 2018 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning 10 management system for classroom use. 5  8.10.2023 PPF Example Wheat Point Production (tons) on Com- 6,000 graph puters Wheat E 5,000 A 500 0 D 4,000 B 400 1,000 3,000 C C 250 2,500 2,000 D 100 4,000 B 1,000 E 0 5,000 A 0 0 100 200 300 400 500 600 Computers © 2018 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning 11 management system for classroom use. Active Learning 1 Points off the PPF On the graph above, 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? 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? © 2018 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning 12 management system for classroom use. 6  8.10.2023 Active Learning 1 Answers Point F: 100 Wheat computers, 3000 (tons) tons wheat 6,000 Requires 40,000 5,000 hours of labor 4,000 Possible but not 3,000 F efficient: could 2,000 get more 1,000 of either good without 0 0 100 200 300 400 500 600 sacrificing any of the other Computers © 2018 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning 13 management system for classroom use. Active Learning 1 Answers Point G: 300 Wheat computers, 3500 (tons) tons wheat 6,000 Requires 65,000 5,000 hours of labor. 4,000 G Not possible 3,000 because the 2,000 economy only has 50,000 1,000 hours 0 0 100 200 300 400 500 600 Computers © 2018 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning 14 management system for classroom use. 7  8.10.2023 The PPF: What We Know So Far Points on the PPF (like A – E): possible – Efficient: all resources are fully utilized Points under the PPF (like F): possible – Not efficient: some resources are underutilized (e.g., workers unemployed, factories idle) Points above the PPF (like G) – Not possible © 2018 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning 15 management system for classroom use. The PPF Moving along a PPF – Involves shifting resources from the production of one good to the other Society faces a tradeoff – Getting more of one good requires sacrificing some of the other The slope of the PPF – The opportunity cost of one good in terms of the other © 2018 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning 16 management system for classroom use. 8  8.10.2023 The PPF and Opportunity Cost Wheat The slope of a line (tons) –1000 equals the “rise 6,000 slope = = –10 over the run.” 100 5,000 4,000 3,000 Opportunity cost of 2,000 1 computer = 1,000 10 tons of wheat. 0 0 100 200 300 400 500 600 Computers © 2018 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning 17 management system for classroom use. Active Learning 2 PPF and Opportunity Cost In which country is the opportunity cost of cloth lower? FRANCE ENGLAND Wine Wine 600 600 500 500 400 400 300 300 200 200 100 100 0 0 0 100 200 300 400 0 100 200 300 400 Cloth Cloth © 2018 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning 18 management system for classroom use. 9  8.10.2023 Active Learning 2 Answers England, because its PPF is not as steep as France’s FRANCE ENGLAND Wine Wine 600 600 500 500 400 400 300 300 200 200 100 100 0 0 0 100 200 300 400 0 100 200 300 400 Cloth Cloth © 2018 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning 19 management system for classroom use. Economic Growth and the PPF With additional Wheat resources or an (tons) Economic improvement in 6,000 growth shifts technology, 5,000 the PPF the economy can 4,000 outward. produce more 3,000 computers, 2,000 more wheat, 1,000 0 0 100 200 300 400 500 600 or any combination in between. Computers © 2018 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning 20 management system for classroom use. 10  8.10.2023 The Shape of the PPF Shape of the PPF – Straight line: constant opportunity cost Previous example: the opportunity cost of 1 computer is 10 tons of wheat – Bowed outward: increasing opportunity cost As more units of a good are produced, we need to give up increasing amounts of the other good produced © 2018 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning 21 management system for classroom use. Why the PPF Might Be Bowed Outward As the economy Beer shifts resources from beer to mountain bikes: PPF becomes steeper and the opportunity Mountain cost of mountain Bikes bikes increases. © 2018 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning 22 management system for classroom use. 11  8.10.2023 Why the PPF Might Be Bowed Outward At A, opportunity cost At point A, most Beer A of mountain bikes is low. workers are producing beer, even those who are better suited to building bikes. So, do not have to give up much beer to get more bikes. Mountain Bikes © 2018 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning 23 management system for classroom use. Why the PPF Might Be Bowed Outward At B, most workers Beer A are producing bikes. The few left in beer production are the B best brewers. Producing more At B, opportunity cost of mountain bikes would require bikes is high. shifting some of the best brewers away Mountain from beer production Bikes causing a big drop in beer output. © 2018 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning 24 management system for classroom use. 12  8.10.2023 Why the PPF Might Be Bowed Outward The PPF is bowed outward when: – Different workers have different skills – Different opportunity costs of producing one good in terms of the other – There is some other resource, or mix of resources with varying opportunity costs E.g., different types of land suited for different uses © 2018 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning 25 management system for classroom use. The Economist as a Scientist Microeconomics – The study of how households and firms make decisions and how they interact in markets Macroeconomics – The study of economy-wide phenomena, including inflation, unemployment, and economic growth © 2018 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning 26 management system for classroom use. 13  8.10.2023 The Economist as Policy Adviser Positive statements: descriptive – Attempt to describe the world as it is – Confirm or refute by examining evidence: “Minimum-wage laws cause unemployment” Normative statements: prescriptive – Attempt to prescribe how the world should be: “The government should raise the minimum wage” © 2018 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning 27 management system for classroom use. Active Learning 3 Positive vs. Normative Which of these statements are “positive” and which are “normative”? How can you tell the difference? a. Prices rise when the government increases the quantity of money. b. The government should print less money. c. A tax cut is needed to stimulate the economy. d. An increase in the price of burritos will cause an increase in consumer demand for music downloads. © 2018 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning 28 management system for classroom use. 14  8.10.2023 Active Learning 3 Answers a. Prices rise when the government increases the quantity of money. Positive – describes a relationship, could use data to confirm or refute. b. The government should print less money. Normative – this is a value judgment, cannot be confirmed or refuted. © 2018 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning 29 management system for classroom use. Active Learning 3 Answers c. A tax cut is needed to stimulate the economy. Normative – another value judgment. d. An increase in the price of burritos will cause an increase in consumer demand for music downloads Positive – describes a relationship. Note that a statement need not be true to be positive. © 2018 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning 30 management system for classroom use. 15  8.10.2023 Why Economists Disagree Economists often give conflicting policy advice – Can disagree about the validity of alternative positive theories about the world – 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 © 2018 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning 31 management system for classroom use. ASK THE EXPERTS Ticket Resale “Laws that limit the resale of tickets for entertainment and sports events make potential audience members for those events worse off on average.” © 2018 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning 32 management system for classroom use. 16  8.10.2023 Propositions about Which Most Economists Agree (and percentage of economists 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 agricultural subsidies. (85%) Local and state governments should eliminate subsidies to professional sports franchises (85%) © 2018 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning 33 management system for classroom use. Propositions about Which Most Economists Agree (and percentage of economists who agree) Cash payments increase the welfare of recipients to a greater degree than do transfers-in kind of equal cash value. (84%) A large federal budget deficit has an adverse effect on the economy. (83%) The United States should not ban genetically modified crops. (82%) A minimum wage increases unemployment among young and unskilled workers. (79%) Government subsidies on ethanol in the United States should be reduced or eliminated. (78%) © 2018 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning 34 management system for classroom use. 17  8.10.2023 Summary Economists are scientists – Make appropriate assumptions and build simplified models – The circular-flow diagram and the production possibilities frontier Microeconomists study decision making by households and firms and their interactions in the marketplace Macroeconomists study the forces and trends that affect the economy as a whole © 2018 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning 35 management system for classroom use. Summary A positive statement is an assertion about how the world is A normative statement is an assertion about how the world ought to be As policy advisers, economists make normative statements Economists sometimes offer conflicting advice – Differences in scientific judgments – Differences in values © 2018 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning 36 management system for classroom use. 18