Chapter 2: Thinking like an economist Ch. 2: Thinking like an economist
Microeconomics versus Macroeconomics 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. These two branches of economics are closely intertwined, yet distinct - they address different questions.
Economics as a science: Economists seek to both explain and improve the world. Economist employ models, or simplified versions of the real world, to gain understanding of complex economic questions. Models Not Models
Modeling an economy: Two types of actors: (1) households and (2) firms. Two types of markets: (1) goods and services and (2) factors of production. Factors of production: labor, land and capital (buildings, machines).
Modeling an economy: Households purchase goods and services by renting factors of production (that they own) (e.g. land, labor and capital) to firms. Firms maximize profits by using those rented factors of production to produce and sell goods and services.
Production possibilities frontier (PPF): 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: An asteroid is going to hit the planet and destroy life as we know it. NASA only has 36 days to launch a countermeasure - a nuclear warhead that must be burried deep into the asteroid. NASA needs spaceships and astronauts to complete the mission. It takes 1 days to build a spaceship and 1 days to train an astronaut. What is NASA s production possibilities frontier (PPF)?
Production possibilities frontier (PPF): 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. 4 NASA s Production Possibilities Frontier (PPF) for spaceships and astronauts 3 Number of astronauts 2 1 1 2 3 4 Number of spaceships
Production possibilities frontier (PPF): 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. 4 NASA s Production Possibilities Frontier (PPF) for spaceships and astronauts 3 Number of astronauts 2 1 1 2 3 4 Number of spaceships
Production possibilities frontier (PPF): 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. 4 (, 36) NASA s Production Possibilities Frontier (PPF) for spaceships and astronauts 3 Number of astronauts 2 1 1 2 3 4 Number of spaceships
Production possibilities frontier (PPF): 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. 4 (, 36) NASA s Production Possibilities Frontier (PPF) for spaceships and astronauts 3 (1, 26) Number of astronauts 2 1 1 2 3 4 Number of spaceships
Production possibilities frontier (PPF): 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. 4 (, 36) NASA s Production Possibilities Frontier (PPF) for spaceships and astronauts 3 (1, 26) Number of astronauts 2 (2, 16) 1 1 2 3 4 Number of spaceships
Production possibilities frontier (PPF): 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. 4 (, 36) NASA s Production Possibilities Frontier (PPF) for spaceships and astronauts 3 Number of astronauts 2 (1, 26) PPF (2, 16) 1 (3, 6) (3.6, ) 1 2 3 4 Number of spaceships
Production possibilities frontier (PPF): Production Possibilities Frontier (PPF): what is the PPF of our class? Consider that we each have 6 seconds of labor and can complete multiplication problems or addition problems. What does our PPF look like? Labor 1: Labor 2: 12 x 4 =? 4+62=? 8 x 6 =? 12+13=? 3 x 7=? 1+51=?
Production possibilities frontier (PPF): Production Possibilities Frontier (PPF): what is the PPF of our class? Consider that we each have 6 seconds of labor and can complete multiplication problems or rhyme words. What does our PPF look like? What points are possible? What points are efficient? inefficient?
PPF and opportunity cost? Recall: the opportunity cost of an item is what must be given up in order to obtain that item. Moving along a PPF involves shifting resources (e.g. labor) 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 tells you the opportunity cost of one good in terms of the other.
PPF and opportunity cost? In Wyoming, what is the opportunity cost of an additional rodeo? an additional swing dancing club? 4 Wyoming s Production Possibilities Frontier (PPF) for rodeos and swing dancing clubs 3 Number of swing 2 dancing clubs PPF 1 5 1 15 2 Number of rodeos
PPF and opportunity cost? In Wyoming, what is the opportunity cost of an additional rodeo? an additional swing dancing club?
PPF and opportunity cost? Opportunity cost and dog breeding. Dog breeding in Russia Dog breeding in Mexico 1 1 Siberian Huskies 5 Siberian Huskies 5 5 1 5 1 Chihuahuas Chihuahuas
PPF: Technology allows us to produce more with the same resources. 4 Wyoming s Production Possibilities Frontier (PPF) for rodeos and swing dancing clubs: technology shock Consume more dance clubs and rodeos with same amount of resources. 3 Number of swing 2 dancing clubs If there is an increase in technology, perhaps Wyoming gets better carpenters that can build stadiums and dance clubs more efficiently, the PPF frontier ships outward. 1 5 1 15 2 Number of rodeos