Economic IssuesEconomic ThinkingEconomics and EconomistsEconomics Models and Issues an IntroductionFigure 1 The Circular FlowFigure 8 Illustrating Constant Opportunity CostFigure 7 Illustrating Increasing Opportunity CostThe Power of TradeVoluntary ExchangeEconomic Issues•Economics is the study of how society allocates its scarce resources among competing demand to improve human welfare.•Scarcity exists because human wants exceed the resources available to satisfy them.•Scarcity implies that choices must be made and economics is the study of those choices. Specifically, economics studies how societies answer the following questions:–What will be produced?–How it will be produced?–For whom will it be produced?Economic Thinking•Economics as a social Science•The scientific method –Observation, Theory, and Testing–Assumptions and ceteris paribus–Avoiding flaws in logical thinking•Ergo hoc post proper hoc – Correlation does not equal causation•Fallacy of Composition/Division•Microeconomics vs. MacroeconomicsEconomics and Economists•Positive versus normative•Avoiding unintended consequences •Scientist, advisor and citizen•Scientific judgment, values, perception versus realityEconomics Models and Issuesan Introduction•The art of making models = making them simple and effective•Example: circular flow – what, how and for whom questions.–overall economy, role of economic agents, output and income, product and factor markets•Example: production possibilities frontier (PPF) -efficiency, tradeoffs, opportunity costs, law of increasing costs, economic growth.Figure 1 The Circular FlowCopyright © 2004 South-WesternSpendingGoods andservicesboughtRevenueGoodsand servicessoldLabor, land,and capitalIncome = Flow of inputs and outputs = Flow of dollarsFactors ofproductionWages, rent,and profit FIRMS•Produce and sellgoods and services•Hire and use factorsof production •Buy and consumegoods and services•Own and sell factorsof productionHOUSEHOLDS •Households sell•Firms buyMARKETSFORFACTORS OF PRODUCTION •Firms sell•Households buyMARKETSFORGOODS AND SERVICESFigure 8 Illustrating Constant Opportunity CostProduction Possibilities FrontierPizzaSoda0 1 2 3987654321Opportunity Cost of going from 0 units of Pizza to 1 unit of pizzaOpportunity Cost of going from 1 unit of Pizza to 2 units of pizzaOpportunity Cost of going from 2 units of Pizza to 3 units of pizzaFigure 7 Illustrating Increasing Opportunity CostProduction Possibilities FrontierPizzaSoda0 1 2 310987654321Opportunity Cost of going from 0 units of Pizza to 1 unit of pizzaOpportunity Cost of going from 1 unit of Pizza to 2 units of pizzaOpportunity Cost of going from 2 units of Pizza to 3 units of pizzaThe Power of Trade•Voluntary versus involuntary exchange•An intuitive approach to gains in trade•Using an economic model to demonstrate the gains from tradeVoluntary Exchange•All parties to a voluntary exchange must be made better off•Allow for specialization and division of labor•Increase interdependence•Promote cooperation rather than
View Full Document