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Principles of Microeconomics
Thinking like an Economist
The
scientific
method
Economic models
Spending
Goods and
services
bought
Revenue
Goods
and services
sold
Labor, land,
and capital
Income
= Flow of inputs and outputs
= Flow of dollars
Factors of
production
Wages, rent,
and profit
FIRMS
•Produce and sell
goods and services
•Hire and use factors
of production
•Buy and consume
goods and services
•Own and sell factors
of production
HOUSEHOLDS
•Households sell
•Firms buy
MARKETS
FOR
FACTORS OF PRODUCTION
•Firms sell
•Households buy
MARKETS
FOR
GOODS AND SERVICES
Circular Flow Diagram • Draw a circular flow diagram.
• Identify the parts of the model that correspond to the flow of goods and services and the flow of dollars for each of the following activities:
– John pays a storekeeper P100 for a gallon of milk.
– John gets a gallom of milk.
– Yoko earns P450 per day working at a call center
– Yoko works at a call center
Quick Activity
Our Second Model:
The Production Possibilities Frontier
The Production Possibilities Frontier
Quantity of
Computers
Produced
Quantity of
Cars Produced
3,000
0 1,000
2,000
700
1,000
300
A
B
2,200
600
C
D
The Production Possibilities Frontier
Quantity of
Computers
Produced
Quantity of
Cars Produced
3,000
1,000
2,000
2,200 A
700 600 300 0 1,000
B
C
D
Production possibilities frontier
4,000
The Production Possibilities Frontier
Quantity
of Computers
Produced
Quantity of
Cars Produced
3,000
2,000 A
700 0 1,000
E 2,100
750
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
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 0
1,000
2,000
3,000
4,000
5,000
6,000
0 100 200 300 400 500 600
Computers
Wheat
(tons)
A
B
C
D
E
PPF Example
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?
Quick Activity
Quick Activity
0
1,000
2,000
3,000
4,000
5,000
6,000
0 100 200 300 400 500 600
Computers
Wheat
(tons)
F
0
1,000
2,000
3,000
4,000
5,000
6,000
0 100 200 300 400 500 600
Computers
Wheat
(tons)
G
The PPF and Opportunity Cost
The slope of a line equals the “rise over the run,” the amount the line rises when you move to the right by one unit.
0
1,000
2,000
3,000
4,000
5,000
6,000
0 100 200 300 400 500 600
Computers
Wheat
(tons)–1000
100 slope = = –10
Here, the
opportunity cost of
a computer is
10 tons of wheat.
20
In which country is the opportunity cost of cloth lower?
0
100
200
300
400
500
600
0 100 200 300 400
Cloth
Wine
0
100
200
300
400
500
600
0 100 200 300 400
Cloth
Wine
FRANCE ENGLAND
Quick Activity
0
1,000
2,000
3,000
4,000
5,000
6,000
0 100 200 300 400 500 600
Computers
Wheat
(tons)
Economic Growth and the PPF
Economic growth shifts the PPF outward.
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 video rentals.
Quick Activity
Why Economists Disagree?
Photo Sources
• https://sophialearning.s3.amazonaws.com/spcc_courses_media/14/big/microeconomics.jpg?1382519767
• http://dawgpoundnation.com/wp-content/uploads/2014/09/wpid-experiment-cat-scientist.jpeg
• http://farm6.static.flickr.com/5219/5389704252_12e4f1e2e4_z.jpg
• http://radar.zhaw.ch/images/rotating_earth.gif
• http://interacc.typepad.com/.a/6a01053596fb28970c0168e8d83913970c-350wi
• http://www.google.com.ph/url?sa=i&rct=j&q=&esrc=s&source=images&cd=&ved=0CAQQjBw&url=http%3A%2F%2Fwww.teradatamagazine.com%2Ftdmo_assets%2Ftdmo_images%2Fa_new_frontier_headline.jpg&ei=eTl0VLzWBuTImAXh6YCoBw&bvm=bv.80185997,d.dGY&psig=AFQjCNGK-UZ5sggA09ZOHWkbTOLNM-5jRw&ust=1416989422169293
• http://www.funnycatsite.com/pictures/Wise_Cat_Has_The_Wise.jpg
• http://i.investopedia.com/thumbnails/live/208_positiveandnormativeeconomics_421x236.jpg
• http://www.jmruk.com/wp-content/uploads/2012/09/nrcyovQ.jpg
• http://www.andreareiser.com/wp-content/uploads/2011/04/Kids-arguing.jpg
• Graphs and Quick Activity Source: Premium PowerPoint Slides by Ron Cronovich
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