MICROECONOMICS BU 224

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MICROECONOMICSBU 224

• Seminar
• Two

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Agenda

• Course Issues and Questions
• Models
• Production Possibilities Curve
• Comparative Advantage
• Circular Flow
• Positive and Normative Economics
• Review of Questions from the Text
• Homework

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What is an economic model?

• A simplified description of reality used to
  understand and predict the relationships between
  variables

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What is the purpose of an economic model?

• To forecast or predict the results of various
  changes in variables

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What is thescientific method?

• Problem identification
• Model development
• Testing a theory

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Identify the problem
Develop a model basedon simplified assumptions
Test the model and formulate a conclusion
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What conclusion can we make?

• If the evidence supports the model, the
  conclusion is to accept the model. If not, the
  model is rejected

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What is the difference between association and
causation?

• We cannot always assume that when one event
  follows another, the first caused the second

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What are resources?

• The basic categories of inputs used to produce
  goods and services

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What are the three categories of resources?

• Land
• Labor
• Capital

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What is aland resource?

• A shorthand expression for any natural resource
  provided by nature

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What is labor?

• The mental and physical capacity of workers to
  produce goods and services

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What is capital?

• The physical plants, machinery, and equipment
  used to produce other goods, they do not directly
  satisfy human wants

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What isfinancial capital?

• The money used to purchase capital. Financial
  capital by itself is not productive, it is a
  paper claim on capital

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What is entrepreneurship?

• Creative labor of individuals that enables them
  to seek profits by combining resources

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Labor
Land
Capital
Entrepreneurship organizes resources to produce
goods and services
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What is a production possibilities curve?

• A curve that shows the maximum combinations of
  two outputs that an economy can produce, given
  its available resources and technology

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What is technology?

• The body of knowledge and skills applied to how
  goods are produced

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What assumptions underlie the productions
possibilities model?

• Fixed resources
• Fully employed resources
• Technology unchanged

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What iseconomic growth?

• The ability of an economy to produce greater
  levels of output, an outward shift of its
  production possibilities curve

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Economic growth
Technological advance
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Technological Advance
Computers
Pizzas
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What is the conclusion of the production
possibilities curve?

• Scarcity limits an economy to points on or below
  its production possibilities curve

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On average, households in China save 40 percent
of their annual income each year, whereas
households in the United States save less than 5
percent. Production possibilities are growing at
roughly 9 percent annually in China and 3.5
percent in the United States. Use graphical
analysis of present goods versus future goods
to explain the differences in growth rates
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Comparative vs. absolute advantage

• Comparative advantage the opportunity cost of
  producing the good is lower for that individual
  than for other people.
• Absolute advantage if he or she can do it better
  than other people.
• Careful Dont confuse comparative advantage with
  absolute advantage!

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Comparative Advantage and Gains from TradeEx.
Tom and Hank
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Tom and Hanks Opportunity Costs of Fish and
Coconuts
Both castaways are better off when they each
specialize in what they are good at and trade.
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Specialize and Trade
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What ispositive economics?

• An analysis limited to statements that are
  verifiable

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What isnormative economics?

• An analysis based on value judgement

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Chapter Two Questions

• 9. Are the following statements true or false?
  Explain your answers.
• When people must pay higher taxes on their wage
  earnings, it reduces their incentive to work is
  a positive statement.
• b. We should lower taxes to encourage more work
  is a positive statement.
• c. Economics cannot always be used to completely
  decide what society ought to do.
• d. The system of public education in this
  country generates greater benefits to society
  than the cost of running the system is a
  normative statement.
• e. All disagreements among economists are
  generated by the media.

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Unit Two Homework Questions
St Atanagio is a remote island in the Atlantic.
The inhabitants grow corn and breed poultry. The
accompanying table shows the maximum annual
output combinations of corn and poultry that can
be produced. Obviously, given their limited
resources and available technology, as they use
more of their resources for corn production,
there are fewer resources available for breeding
poultry.
a. Draw a production possibility frontier with
corn on the horizontal axis and poultry on the
vertical axis illustrating these options, showing
points 17.
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Unit Two Homework Questions
2. Can St. Atanagio produce 650 pounds of poultry
and 650 pounds of corn? Explain. Where would this
point lie relative to the production possibility
frontier?   3. What is the opportunity cost of
increasing the annual output of corn from 800 to
1000 pounds?      4. What is the opportunity cost
of increasing the annual output of corn from 200
to 400 pounds?    5.Can you explain why the
answers to parts 3. and 4. above are not the
same? What does this imply about the slope of the
production possibility frontier?
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Microeconomics

• Questions?