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Chapter 2

Chapter 2 Thinking like an Economist.docx

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ECN 204
Paul Missios

Chapter 2: Thinking like an Economist Economists play two roles: 1) Scientists: try to explain the world -Economists employ the scientific method, the dispassionate development and testing of theories about how the world works 2) Policy Advisors: try to improve it Assumptions simplify the complex world and it makes it easier to understand Model: a highly simplified representation of a more complicated reality. The Production Possibilities Frontier (PPF ) -a graph that shows the combinations of two goods the economy can possible produce given the available resources and the available technology -Extreme possibilities are the max computers and no wheat and vice versa Example: Two goods (computers and wheat), One resource (labor measured in hours), Economy has 50,000 labor hours per month available for production. Producing one computer requires 100 hours of labor and producing one ton of wheat requires 10 hours of labor A PPF graph -The Point F, which represents 100 computers and 3000 tons of wheat = requires 40,000 hours of labor, it is possible for economy to produce this but it will not be efficient because you can get more of either good without sacrificing any of the other -The Point G, which represents 300 computers and 2500 wheat= requires 65,000 hours of labor, it is not possible for the economy to produce this because the economy only has 50,000 hoursTherefore: 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 example workers unemployed, factories idle) Points ABOVE the PPF (like G) = Not Possible -Moving along a PPF involves shifting resources such as labor from the production of one good to the other -Society faces a tradeoff: Getting more of one good requires sacrificing some of the other (Point A opportunity cost to Point B) -The slope of the PPF tells you the opportunity cost of one good in terms of the other *The rise is a negative number because as you move to the right, the line falls meaning what output is reduced. Moving to the right involves shifting resources from the production of wheat (which causes what output to fall) to the production of computers (which causes computer production to rise). Producing an additional computer requires the resources that would otherwise produce 10 tons of wheat. *The slope of a line equals the “rise over the run” the amount the line rises when you move to the right by one unit. Here the opportunity cost of a computer is 10 tons of wheat. Economic Growth and the PPF With additional resources or an improvement in technology, the economy can produce more computers, more wheat, or any combination in between. *The PPF shows the tradeoff between the outputs of difference goods at a given time, but the tradeoff can change over time. For example, over time the economy might get more workers (or more factories/land), or a more efficient technology might be invented. Both events- an increase in the economy’s resource or an improvement in technology causes an expansion in the set of opportunities. That is, both allow the economy to produce more of one or both goods. *In the side, economic growth causes a parallel outward shift of the PPF. Since the new PPF is parallel to the old one, the tradeoff between the two goods is the same. However, if a new technology had more impact on the computer industry that on the wheat industry then the horizontal (computer) intercept would increase more than the vertical (wheat) intercept, and the PPF would become flatter = the opportunity cost of computers would fall because the technology has made them relatively cheaper (relative to wheat). Shape of the PPF -The PPF could be a str
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