Embed Size (px)
Citation preview
Copyright © 2004 South-Western/Thomson Learning
Economic Models
• Economics trains you to. . . . • Think in terms of alternatives.• Evaluate the cost of individual and social choices.• Understand how certain events and issues are related.
• Economists use models to simplify reality in order to
improve our understanding of the world
• Our first economic model….• The Production Possibilities Frontier
Copyright © 2004 South-Western/Thomson Learning
The Production Possibilities Frontier
• The production possibilities frontier (PPF) is a graph that shows the combinations of output that the economy can possibly produce given the available factors of production and the available production technology.
The Production Possibilities Frontier
Copyright©2003 Southwestern/Thomson Learning
Productionpossibilitiesfrontier
A
B
C
Quantity ofCars Produced
2,200
600
1,000
3000 700
2,000
3,000
1,000
Quantity ofComputers
Produced
D
Copyright © 2004 South-Western/Thomson Learning
Our Second Model: The Production Possibilities Frontier• Concepts Illustrated by the Production
Possibilities Frontier • Scarcity
• Efficiency
• Tradeoffs
• Opportunity Cost
• Economic Growth
Wheat or Oranges?
Copyright © 2004 South-Western/Thomson Learning
An Aging America and the PPF
• The average age of Americans will rise significantly as the elderly make up a larger and larger share of the total population:
• Suppose the US economy can produce two goods, medical care and food.
• Draw a PPF and a possible production point representing the original situation before the average age of the US population has begun to increase.
• Now draw another possible point representing the change that may occur as the population ages.
Copyright © 2004 South-Western/Thomson Learning
An Aging America and the PPF
Copyright © 2004 South-Western/Thomson Learning
Microeconomics and Macroeconomics
• Microeconomics focuses on the individual parts of the economy.• How households and firms make decisions and how they
interact in specific market settings.
• Macroeconomics looks at the economy as a whole.• Economy-wide phenomena, including inflation,
unemployment, and economic growth.
See Practice Worksheet
Copyright © 2004 South-Western/Thomson Learning
The Power of Economics
• Economists try to explain the world (scientists).• Positive economic analysis describes what is, descriptive
analysis, scientific method, objective.
• Economists try to change the world (policy).• Normative economic analysis describes what should be,
prescriptive analysis, policy recommendation, subjective.
See Practice Worksheet
Copyright © 2004 South-Western/Thomson Learning
• Positive or Normative? • U.S. spending on healthcare is rising faster than Gross
Domestic Product (GDP).
• The U.S. should spend less on healthcare.
POSITIVE VERSUS NORMATIVE ANALYSIS
??
Copyright © 2004 South-Western/Thomson Learning
• Positive or Normative? • Enacting price controls on prescription drugs will result
in fewer new/innovative drugs being developed.
• The U.S should not enact price regulations to control the cost of prescription drugs.
POSITIVE VERSUS NORMATIVE ANALYSIS
??
Copyright © 2004 South-Western/Thomson Learning
ECONOMISTS DISAGREE
• They may disagree about the validity of alternative positive theories on how the world works.
• They may have different normative views about what policies to pursue and what policies should try to accomplish.
• But all economists agree on two things…..
Copyright © 2004 South-Western/Thomson Learning
ECONOMISTS AGREE
• Good normative policy prescriptions must be based on sound positive economic analysis.
• And……
