MICROECONOMICS BU 224 Seminar Two
Agenda Course Issues and Questions Models Production Possibilities Curve Positive and Normative Economics Review of Questions from the Text Where are we going next?
What is an economic model? A simplified description of reality used to understand and predict the relationships between variables
What is the purpose of an economic model? To forecast or predict the results of various changes in variables
What is the scientific method? Problem identification Model development Testing a theory
Develop a model based on simplified assumptions Identify the problem Develop a model based on simplified assumptions Test the model and formulate a conclusion
What conclusion can we make? If the evidence supports the model, the conclusion is to accept the model. If not, the model is rejected
What is the difference between association and causation? We cannot always assume that when one event follows another, the first caused the second
What is a production possibilities curve? A curve that shows the maximum combinations of two outputs that an economy can produce, given its available resources and technology
What is technology? The body of knowledge and skills applied to how goods are produced
What assumptions underlie the productions possibilities model? Fixed resources Fully employed resources Technology unchanged
A Z B C U D Production Possibilities Curve Output of military goods Unattainable point C Output of military goods All points on curve are efficient U Inefficient point D Output of consumer goods
What is economic growth? The ability of an economy to produce greater levels of output, an outward shift of its production possibilities curve
Economic growth Technological advance
Technological Advance Computers Pizzas
What is the conclusion of the production possibilities curve? Scarcity limits an economy to points on or below its production possibilities curve
What is positive economics? An analysis limited to statements that are verifiable
What is normative economics? An analysis based on value judgement
Chapter Two Questions 9. Are the following statements true or false? Explain your answers. “When people must pay higher taxes on their wage earnings, it reduces their incentive to work” is a positive statement. b. “We should lower taxes to encourage more work” is a positive statement. c. Economics cannot always be used to completely decide what society ought to do. d. “The system of public education in this country generates greater benefits to society than the cost of running the system” is a normative statement. e. All disagreements among economists are generated by the media.
Unit Two Homework Questions Atlantis is a small, isolated island in the South Atlantic. The inhabitants grow potatoes and catch fresh fish. The accompanying table shows the maximum annual output combinations of potatoes and fish that can be produced. Obviously, given their limited resources and available technology, as they use more of their resources for potato production, there are fewer resources available for catching fish. a. Draw a production possibility frontier with potatoes on the horizontal axis and fish on the vertical axis illustrating these options, showing points A–F
Unit Two Homework Questions b. Can Atlantis produce 500 pounds of fish and 800 pounds of potatoes? Explain. (15pts) Where would this point lie relative to the production possibility frontier? (10pts) c. What is the opportunity cost of increasing the annual output of potatoes from 600 to 800 pounds? (15pts) d. What is the opportunity cost of increasing the annual output of potatoes from 200 to 400 pounds? (15pts) e. Can you explain why the answers to parts c and d are not the same? (10pts) What does this imply about the slope of the production possibility frontier? (15pts)
Microeconomics Questions?