Microeconomics and Macroeconomics focuses on the individual parts of the economy How households and firms make decisions and how they interact in specific markets looks at the economy as a whole Economy wide phenomena including inflation unemployment and economic growth Microeconomics and Macroeconomics Should people install GPS Global Positioning System navigation system in their cars Should the Federal Reserve raise the interest rate further Should our local county open a neighborhood gym for teenagers POSITIVE VERSUS NORMATIVE ANALYSIS are statements that attempt to describe the world as it is Called descriptive analysis are statements about how the world should be Called prescriptive analysis 1 POSITIVE VERSUS NORMATIVE ANALYSIS Positive or Normative Statements An increase in the minimum wage will cause a decrease in employment among the least skilled State governments should be allowed to collect from tobacco companies the costs of treating smoking related illnesses among the poor POSITIVE VERSUS NORMATIVE ANALYSIS Positive or Normative Statements The income gains from a higher minimum wage are worth more than any slight reductions in employment Higher federal budget deficits will cause interest rates to increase The Scientific Method Observation Theory and More Observation Uses to help explain how a complex real world operates Develops theories collects and analyzes data to evaluate the theories Economists make in order to make the world easier to understand 2 Economic Models Economists use to simplify reality in order to improve our understanding of the world Two of the most basic economic models include Our First Model The Circular Flow Diagram The is a visual model of the economy that shows how dollars flow through markets among households and firms The Circular Flow Diagram MARKETS FOR GOODS AND SERVICES Firms sell Goods Households buy and services sold Revenue HOUSEHOLDS Buy and consume goods and services Own and sell factors of production FIRMS Produce and sell goods and services Hire and use factors of production Factors of production Wages rent and profit Spending Goods and services bought MARKETS FOR FACTORS OF PRODUCTION Households sell Firms buy Labor land and capital Income Flow of inputs and outputs Flow of dollars 3 Our Second Model The Production Possibilities Frontier The is a graph that shows the combinations of that the economy can possibly produce given the available and the available The Production Possibilities Frontier Quantity of Computers Produced 3 000 D C 2 200 2 000 A Production possibilities frontier B 1 000 0 300 600 700 1 000 Quantity of Cars Produced Our Second Model The Production Possibilities Frontier Concepts Illustrated by the Production Possibilities Frontier 4 A Shift in the Production Possibilities Frontier Quantity of Computers Produced 4 000 3 000 2 100 2 000 0 E A 700 750 1 000 Quantity of Cars Produced 5