Assumption and Models Assumption Assumption simplify the complex world Ex For studying trade we can assume only one seller and one buyer Unrealistic but easier to understanding Model Highly simplified representation of world with assumption The first model Circular Flow Diagram Two actor households firms Two market good services market factor of production market The second model Production Possibility Frontier PPF is a graph shows the combinations of output that the economy can possibly produce given the available factors of production and the available production technology Ex Goods computers and wheat Resource labor 50 000 labor hours per month Points on the PPF like A E Possible and efficient all resources are fully utilized Points under the PPF like F Possible but not efficient some resources underutilized workers unemployed factories idle Points above the PPF like G not possible yet Technology and economy development could shift PPF outward The PPF and Opportunity Cost Opportunity cost of an item is what must be given up to obtain that item Moving along a PPF involves shifting resources from the production of one good to the other Tradeoff getting more of one good requires sacrificing some of the other The slope of the PPF tells you the opportunity cost of one good in terms of the other The Shape of PPF PPF is a straight line if opp cost remains constant Ex computers vs wheat see last topic PPF is bow shaped if opp cost of a good rises as the economy produces more of the good Ex Beer vs Mountain bikes Assume the resource is labor workers Not every worker good at making bikes so shifting resources to mountain bikes increases opp cost of bike Microeconomics and Macroeconomics Brother and sister Microeconomics how households and firms make decisions and how they interact in markets Macroeconomics economy wide phenomena including inflation unemployment and economic growth The Economist as Policy Advisor Positive statements are statements that attempt to describe the world as it is Called descriptive analysis Normative statements are statements about how the world should be Called prescriptive analysis Ex Positive or Normative Statements 1 an increase in the minimum wage will cause a decrease in employment among the least skilled POSITIVE 2 government shouldn t increase min wage NORMATIVE 3 tax cut is needed to stimulate the economy NORMATIVE