WELCOME TO SEMINAR 2 May 25, Wed pm ET BU MICROECONOMICS INSTRUCTOR: PAUL CHOI, PH.D.

LIVE SEMINARS (Wednesday 9-10 pm ET) Live Seminar Schedule: Live Seminar 1: May 18 (Wednesday, 9-10 pm ET) Live Seminar 2: May 25 (Wednesday, 9-10 pm ET) Live Seminar 3: June 1 (Wednesday, 9-10 pm ET) Live Seminar 4: June 8 (Wednesday, 9-10 pm ET) Live Seminar 5: June 15 (Wednesday, 9-10 pm ET) Live Seminar 6: June 22 (Wednesday, 9-10 pm ET) Live Seminar 7: June 29 (Wednesday, 9-10 pm ET) Live Seminar 8: July 6 (Wednesday, 9-10 pm ET) Live Seminar 9: July 13 (Wednesday, 9-10 pm ET) Participation in Live Seminar is not mandatory. If you miss any Live Seminar, listen to the archived Seminars.

SEMINAR Students should carefully read the assigned material and be prepared to ask questions during the seminar. This week's Seminar will focus on the concepts and material presented in Unit 2. The instructor will discuss the main concepts of the material in the chapter(s) assigned for this unit. Students are expected to have read the chapter(s) in the textbook and other material posted by the instructor in “DocSharing” or “Announcements.”

READING: CHAPTER 2 Chapter 2: Economic Models Chapter 2 introduces our first three economic models. Models are simplified representations of reality that allow us to hold everything else constant while examining the effect of a single change on an economic outcome. The production possibility frontier model illustrates the principles of scarcity, opportunity cost, specialization and trade-offs, and efficiency. The model of comparative advantage examines the gains from trade. The circular flow model helps economists analyze the monetary transactions taking place in the economy as a whole.

PRODUCTION POSSIBILITY FRONTIER MODEL Production Possibility Frontier (PPF) The production possibility frontier (PPF) represents the possible combinations of two goods that can be produced in a certain period of time under the conditions a given state of technology and fully employed resources.

PRODUCTION POSSIBILITY FRONTIER MODEL

COMPARATIVE ADVANTAGE MODEL Absolute Advantage An individual has an absolute advantage in an activity if he or she can do it better than other people. Comparative Advantage An individual has a comparative advantage in producing a good or service if the opportunity cost of producing the good or service is lower for him or her than for other people.

COMPARATIVE ADVANTAGE MODEL Wine Cloth England 6 4 Portugal 4 1

THE CIRCULAR-FLOW MODEL The circular-flow diagram is a model that represents the transactions in an economy by flows around a circle: A household is a person or a group of people that share their income. A firm is an organization that produces goods and services for sale. Firms sell goods and services that they produce to households in markets for goods and services (product markets). Firms buy the resources they need to produce – factors of production – in factor markets.

THE CIRCULAR-FLOW MODEL

POSITIVE ECONOMICS VS NORMATIVE ECONOMICS Positive economics is the branch of economic analysis that describes the way economy actually works. Normative economics makes prescriptions about the way the economy should work.

OTHER CONCEPTS Ceteris Paribus (“Other things equal”) assumptions Technology: Technical means for producing goods and services (p. 29) Income distribution: The way in which total income is divided among the owners of the various factors of production (p. 36) Forecast: A simple prediction for the future (p. 38). Barter: People directly exchange goods or services that they have for goods or services that they want (p. 35)

KEY CONCEPTS-REVISITED The use of models to simplify complex economic concepts found in the real world Use of the Production Possibility Frontier model Use of the comparative advantage model to explain gains from trade How the circular flow model explains the flow of resources and goods/services in one direction and money in the other direction The difference between positive and normative economic statements Reasons that economists disagree or agree on issues

UNIT OUTCOMES Outcomes: After completing this unit, you should be able to: Explain how models are used in economics. Compare positive and normative economics. Review graphing concepts.

DISCUSSION BOARD Discussion Board Requirement: Students are to post a minimum of three posts per discussion question. One initial response and two replies to their classmates. Posting on a minimum of three different days, for example: Wednesday, Friday and Monday. The first post must be made by Saturday.

DISCUSSION BOARD Discussion Board Topic: Since all economies are faced with scarcity, how might nations attempt to minimize the human hardship associated with scarcity? Try to use concepts seen in this unit such as production possibilities frontier, comparative advantage, circular flow, etc. in your answer.

ASSIGNMENT Complete the following problem. Be sure to answer every part of the problem unless otherwise noted. Chapter 2: Problem 2 on pages 42

ASSIGNMENT Directions for Submitting Your Assignment: Before you complete your assignment, you should download the Template from the DocSharing and enter your answers directly in that document. Then save your work on your computer in a location and with a name that you will remember. When you are ready, you may submit on the Dropbox page.