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Lecture 2

ECN 211 Lecture 2: Notetaker Notes: Topic 2 Chapter 2 - Thinking Like an Economist

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ECN 211
Stefan Ruediger

LECTURE 2: TOPIC 2/CHAPTER 2 - THINKING LIKE AN ECONOMIST Song of the day: Reel Big Fish- Sell Out • Companies • Work at a fast food restaurant (household) • Buys records (goods & services) • Radio playing popular song (goods & services) • Sign a record deal (household) SCARCITY, CHOICE, AND ECONOMIC MODELS Review • We know from Chapter 1 that the existence of scarcity and the allocation of scare resources are among the central topics of economics • We also know from Chapter 1 that we use markets to organize economic activity and to allocate these scarce resources • Chapter 2 introduces two models that illustrate the concepts of scarcity and resource allocation further ◦ Chapter 2: Introduction into models & how they deal with scarcity Models 1. Circular-Flow Diagram ◦ Flow of money in the economy ◦ Use and creation of resource ‣ How we create products out of natural resources ◦ Actors and markets in the economy 2. Production Possibility Frontier ◦ Allocation of resources ◦ Illustration of opportunity cost ◦ Motivation for trade ◦ Economic efficiency and inefficiency Assumptions & Models • Assumptions simplify the complex world, make it easier to understand ◦ Example ‣ Google maps • They take out the unnecessary things like trees, houses, etc. ◦ Example: ‣ To study international trade, assume two countries and two goods ‣ Unrealistic, but simple to learn and gives useful insights about the real world • Model- a highly simplified representation of a more complicated reality ◦ Economists use models to study economic issues ◦ Gives us the tools to study what we want to study The Circular-Flow Diagram • 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- people selling their skills for income ◦ firms- companies hiring & paying people for their skills • Two markets: ◦ the market for goods and services ◦ the market for “factors of production” (see notes from Chapter 1 for a detailed list) FIGURE 1: The Circular-Flow Diagram • You own your own labor and you go out and sell your labor: working = selling your hours ◦ With that money you buy goods & services ◦ Income & wages are not the same Production Possibility Frontier • The Production Possibilities Frontier (PPF)- a graph that shows the combinations of two goods the economy can possibly produce given the available resources and the available technology ◦ Our Example: ‣ computers and wheat PPF Example • Start by characterizing the economy ◦ Labor is the easiest to move within production • Producing one computer requires 100 hours labor • Producing one ton of wheat requires 10 hours labor • Step 2: making a diagram ◦ Doesn't matter whether wheat or computers is on the x or y axis The PPF: What We Know So Far • Points on the PPF (like A, B, C, D, E ) ◦ possible ◦ efficient- all resources are fully utilized • Points under the PPF (like F ) ◦ possible ◦ not efficient- some resources underutilized (e.g., workers unemployed, factories idle) • Points above the PPF (like G ) ◦ not possible Productive Inefficiency • Productively inefficient ◦ More of at least one good can be produced ‣ Without sacrificing the production of any other good ◦ Points inside the PPF • Productive efficient ◦ The absence of any productive inefficiency ◦ Points on the PPF Recessions • Recessions- Inside the production possibilities frontier: resources are idle, things aren't being used ◦ Slowdown in overall economic activity ◦ Economy operates inside the PPF ◦ Many resources are idle ‣ Widespread unemployment ‣ Factories shut down - not using all available capital • An end to the recession- Moving onto the possibility frontier: we don't have idle resources ◦ Move the economy from a point inside its PPF to a point on its PPF The Search for a Free Lunch • “There’s no such thing as a free lunch” ◦ Even if a meal is provided free of charge to someone, society still uses up reso
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