Micro 1 5 15 Chapter 2 Thinking like an economist What are the economists two roles How do they differ What are the models How do economists use them What are the elements of the circular flow diagram The economist as scientist Economists play 2 roles 1 Scientists try to explain the world without scarcity no work 2 Policy advisors try to improve it In the first economists employ the scientific method the dispassionate developments and testing of theories about how the world works Assumptions and models Assumptions simplify the complex world and make it easier to understand Example To study international trade assume 2 countries and 2 goods Model a highly simplified representation of a more complicated reality Economists use models to study economic issues Examples A road map A model airplane The model teeth at the dentist s office Our first model The Circular flow diagram a visual model of the economy shows how dollars flow through markets among households and firms Two types of actors Households Firms Two markets The market for goods and services The market for factors of production Factors of production Factors of production the resources the economy uses to produce goods and services Including Land Labor Capital Households Own the factors of production sell rent them to firms for income Buy and consume goods ands services Firms Buy hire factors of production use them to produce goods and service Sell goods and services Circular flow diagram Our second model The production possibilities frontier The production possibility frontier PPF A graph that shows the combinations of two goods the economy can possibly produce given the available resources and the available technology Example Two goods computer and wheat One resource Labor measured in hours Economy has 50 000 labor hours per month available for production under more possible but not efficient above good but cant do it not possible stay on line Look old notes The PPF and Opportunity Cost Recall The opportunity cost of an item is what must be given up to obtain that item Moving along a PPF involves shifting resources e g Labor from the production of one good to other Society faces a tradeoff Getting more of one good requires sacrificing some of the other LOSS GAIN Next figure France Wine opp cost England Cloth 2 3 opp cost Best value alternative Wine Opp cost of Cloth France wine England cloth CLOTH BETTER france 2 England 2 3 France should produce wine 1 2 England should produce more cloth Lowest opportunity cost determines it Comparative advantage Opportunity cost which country Which can produce more Absolute advantage which can produce more of good than other Bowed shape figure on phone SUMMARY on PPF Look Ch 3 Microeconomics is the study of how households and firms make decisions and how they interact in markets Macroeconomics is the study of economy wide phenomena including inflation unemployment and economic growth Gov and feds important Cpuozaa olemiss edu Chapter 4 Demand and supply A Market Buyers Sellers B Demand buyers Schedule Curve Law of demand supply Movement along VS shifts in the demand supply curve C Supply sellers Same issues D Interaction of demand and supply Equilibrium price P Equilibrium quantity Q Effects of shifts in demand on P and Q Effects of shifts in supply on P and Q Simultaneous shifts demand and supply curves on P and Q Demand P Price q Quantity Demand Schedule quantities bought at different prices P q 1 10 2 8 3 6 4 4 5 2 Demand curve graphical representation of demand schedule On paper Movement VS shifts in demand curve Movement along On paper Movement along a stationary demand curve is caused by changes in the price level