Ch 2: Thinking Like an EconomistWednesday, September 17, 201411:10 PM-AssumptionsoEconomists use different assumptions when studying the short-run and long-run effects of a change in the quantity of money.-Circular Flow DiagramoA visual model of the economy SpendingRevenueMarkets for goods &Services: Firms sell, Households buyGoods & ServicesBoughtGoods & ServicesHouseholds:-Buy and consume goods And services-Own and sell factorsOf productionFirms-Produce and sellGoods and services-Hire and use factors ofproductionLabor, land, &capitalFactors of productionMarkets for Production Factors:-Households sell-Firms buyIncomeWages, Rent, & profit-Production Possibilities FrontieroGraph that shows the combinations of output that the economy can possibly produce given the available factors of production and the available production technology ¥ I..." ☺Quantity ofComputersProducesF C3,000A2,2002,000BProduction possibilitiesfrontier D1,000E 0300600 700 1,000Quantity ofCars ProducedoAn outcome is said to be efficient if the economy is getting all it can from the scarce resources it has available. Points on, rather than inside, the production possibilities frontier represent efficient levels of productionoPoint D represents an inefficient outcome. Reasons for this could be widespread unemployment. The economy is producing less than it could from the resources it has available. oIf the production moves from point D to point A, the production increases.oThis graph shows one of the ten principles of economics, which is that people face trade-offs. (look at points A & B)oOpportunity cost: the cost of something is what you give up to get it. -The opportunity cost of a car equals the slope of the production possibilities frontieroBecause the graph is bowed outward, the opportunity cost of a car is highest when the economy is producing man cars and few computers, such as point E, where the frontier is steep. oWhen the economy is producing few cars and many computers, such as point F, the frontier is flatter, and the opportunity cost of a car is lower. 2,300 GQuantity ofComputersProducesA 2,200Production possibilitiesfrontier 600 650 1,000Quantity ofCars ProducedoThe tradeoff can change over timeoIf a technological advance raises the number of computers that a worker can produce each week, this expands society's set of opportunities. oFor any given number of cars, the economy can produce more computers. oIf the economy does not produce and computers, it can still produce 1,000 cars, so one endpoint of the frontier stays the same, but the rest of the production possibilities shift outward.oThis figure illustrates economic growth -Microeconomics: the study of how households and firms make decisions and how the interact in markets-Macroeconomics: the study of economywide phenomena, including inflation, unemployment, and economic growth-When economists are trying to explain the world, they are scientists. When they are trying to help improve it, they are policy makers.-Statements about the world come in two types:oPositive statements: claims that attempt to describe the world as it is (scientist)oNormative statements: claims that attempt to prescribe how the world should be (policy maker)-Why do economists disagree?oThey may disagree about the validity of alternative positive theories about how the world worksoThey may have different values and therefore different normative views about what policy should try to