ECON 201 1st Edition Lecture 4 Outline of Last Lecture I. Characteristics of a Market Economic SystemII. Economic FreedomIII. Elements of the Circular Flow Modela. Definition of circular flow modelb. Definition of factors of productionIV. Assumptions of the Circular Flow Modela. Definition of deductive reasoningV. The Circular Flow ModelVI. Elements of Economicsa. Definition of macroeconomicsb. Definition of microeconomicsVII. The Roles of an EconomistOutline of Current Lecture I. The Economist at Worka. Definition of a positive statementb. Definition of a normative statementII. Opportunity Costa. Definition of opportunity costIII. Production Possibilities Frontier (PPF)a. Definition of production possibilities frontier IV. Example PPF ModelCurrent LectureI. The Economist at WorkThere are two types of statements an economist can make about a economic situation. They can use positive statements, which describe the world as it is, or they can use normative statements, which attempt to prescribe how the world should be. To understand the difference between these statements, think of positive statements as similar to facts and normative statements as similar to opinions. Positive statements can be proven true or false, while normative statements often use the wording “should be” or “ought to be” and express an economist’s opinion. The following quote by N. Greg Mankiw was posted on the slide for this lecture.These notes represent a detailed interpretation of the professor’s lecture. GradeBuddy is best used as a supplement to your own notes, not as a substitute.“Do you want to know a dirty little secret of economists who give policy advice? When we do so, we are often speaking not just as economic scientists, but also as political philosophers. Our recommendations are based not only on our understanding of how the world works, but also on our judgments about what makes a good society.” – N. Greg MankiwThis quote shows that economists who give policy advice do so with normative statements and take their own judgments and opinions into account, as Mankiw says in the statement above. II. Opportunity CostScarcity gives rise to tradeoffs and decisions on an individual, firm, government, and society level. What we oftentimes find in scarcity at the society level is that there is a tradeoff between efficiency and equality. This is known as the opportunity cost. The opportunity cost of any item is whatever must be given up to obtain it. You can also call it the next best alternative. This is not necessarily represented in money, but in the benefits you get from choosing one thing over another. An example that was done in class was the opportunity cost of coming to class. The next best alternative for many students was sleeping, eating, or studying. Another example is the opportunity cost of not attending college could be working, being a part of the military, or traveling. Notice that the opportunity cost of not attending college is not the money you could have saved. Rather, it is the second best activity you could have done instead of attending. In this way, economists look at all costs as the value of the next best alternative. III. Production Possibilities Frontier (PPF)The first model we learned in this class was a circular flow model; the second model we will be studying is a production possibilities frontier. A production possibilities frontier, or PPF, is a visual model of scarcity, tradeoffs, and efficiency, showing the combinations of two goods an economy can possibly produce given available resources and available technology. Just like the circular flow model, some assumptions are made for the PPF. First, the model is based on technology and resources currently present at the time, as technology will not change in the course of the analysis. Another assumption is that efficiency is possible and we can and will obtain it. These assumptions are held constant so this model can operate. In this model, there are two types of efficiency and two types of goods. The two types of efficiency are productive and allocative and the two types of goods are consumer and capital goods. Any industry has to decide whether to focus their efforts on producing consumer or capital goods. Consumer goods are goods used by the consumer that do not aid in the production or growth of a company; capital goods are goods that can be used to produce other goods, such as machinery.IV. Example PPF ModelIn this example, we have one country whose labor input can produce two goods: either computers or wheat. They have one resource that is worth 50,000 labor hours. One computertakes 100 hours to produce, while one ton of wheat takes 10 hours to make. Given that we have50,000 labor hours total, we can determine what our PPF is for this example. A table and graph are shown below. Employment of Labor Hours Production (PPF) Computers Wheat Computers Wheat (in tons)A 50,000 0 500 0B 40,000 10,000 400 1,000C 25,000 25,000 250 2,500D 10,000 40,000 100 4,000E 0 50,000 0 5,000Using the information in the PPF column, we can make a graph using the “Computers” data as the “x” variable and the “Wheat” data as the “y” variable.0 100 200 300 400 500 6000100020003000400050006000Production Possibilites FrontierComputersWheat (in tons)Now that we have the PPF for the production of computers and wheat, we can use this graph to make our calculations and analyze the