Chapter 2. Models What is a model? Models: Simplified representation of reality to help us study and understand reality. Reality is too complicated mesh.

Slides:



Advertisements
Similar presentations
2 CHAPTER The Economic Problem.
Advertisements

© 2010 Pearson Addison-Wesley. Why does food cost much more today than it did a few years ago? One reason is that we now use part of our corn crop to.
CHAPTER 2 Economic Models: Trade-offs and Trade. 2 What you will learn in this chapter: Why models?  Simplified representations of reality play a crucial.
2 Trade-offs, Comparative Advantage, and the Market System
1 of 31 chapter: 2 >> Krugman/Wells ©2009  Worth Publishers Economic Models: Trade-offs and Trade.
3 The Economic Problem Notes and teaching tips: 5, 6, 17, and 32.
1.
Chapter 2: The Economic Problem.
© 2010 Pearson Education Canada. Why does food cost much more today than it did a few years ago? One reason is that we now use part of our corn crop.
C H A P T E R C H E C K L I S T When you have completed your study of this chapter, you will be able to Use the production possibilities frontier to.
Ten Principles of Economics
1 CHAPTER INTRODUCTION.
2 THE ECONOMIC PROBLEM CHAPTER.
2 CHAPTER The Economic Problem
3 CHAPTER The Economic Problem. 3 CHAPTER The Economic Problem.
© 2006 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien—1 st ed. c h a p t e r t w o Prepared by: Fernando & Yvonn.
2 THE ECONOMIC PROBLEM Notes and teaching tips: 5, 6, 21, 37, 41, and 58. To view a full-screen figure during a class, click the red “expand” button. To.
2 THE ECONOMIC PROBLEM CHAPTER.
1 of 34 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall · Microeconomics · R. Glenn Hubbard, Anthony Patrick O’Brien, 3e. Chapter.
1 Ten Principles of Economics. TEN PRINCIPLES OF ECONOMICS Economics is the study of how society manages its scarce resources.
© 2008 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien, 2e. Fernando & Yvonn Quijano Prepared by: Chapter 2 Trade-offs,
ECONOMIC DECISION MAKING
THE ECONOMIC PROBLEM 2 CHAPTER. Objectives After studying this chapter, you will be able to:  Define the production possibilities frontier and calculate.
When you have completed your study of this chapter, you will be able to C H A P T E R C H E C K L I S T Use the production possibilities frontier to illustrate.
Ten Principles of Economics
THE ECONOMIC PROBLEM 2 CHAPTER. Objectives After studying this chapter, you will be able to:  Define the production possibilities frontier and calculate.
© 2007 Thomson South-Western. Economic Systems © 2007 Thomson South-Western What is an Economic System? It’s the method used by society to produce goods.
© 2009 Prentice Hall Business Publishing Economics Hubbard/O’Brien UPDATE EDITION Fernando & Yvonn Quijano Prepared by: Chapter 2 Trade-offs, Comparative.
Trade-Offs, Comparative Advantage, and the Market System
© 2009 Prentice Hall Business Publishing Essentials of Economics Hubbard/O’Brien, 2e. Fernando & Yvonn Quijano Prepared by: Chapter 2 Trade-offs, Comparative.
© 2006 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien—1 st ed. c h a p t e r t w o Prepared by: Fernando & Yvonn.
PowerPoint to accompany Chapter 2 Choices and trade-offs in the market.
CHAPTER 2 Economic Models: Trade-offs and Trade © 2005 Worth Publishers, all rights reserved.
WHAT IS ECONOMICS? 1 CHAPTER Dr. Gomis-Porqueras ECO 680.
Dr. David P Echevarria1All Rights Reserved LECTURE #2: MICROECONOMICS CHAPTER 3 Specialization Comparative Advantage Opportunity Costs.
Review for Exam 1 Chapters 1 Through 5. Production Possibilities Frontiers and Opportunity Costs Learning Objective 2.1 Production possibilities frontier.
Microeconomics ECON 2302 Summer I, 2011 Marilyn Spencer, Ph.D. Professor of Economics Chapter 2.
The Economizing Problem Economic Systems Lecture 3 & 4 Dominika Milczarek-Andrzejewska.
Scarcity, Trade-offs, and Comparative Advantage. Scarcity and Trade-offs Households, firms and governments continually face decisions about how best to.
Microeconomics ECON 2302 May 2011
Trade-offs, Comparative Advantage, and the Market System
CHAPTER 2 ECONOMIC MODELS: TRADE-OFFS AND TRADE. Welcome to ECON 2301 Principles of Macroeconomics Dr. Frank Jacobson Mr. Stuckey Week 2 Class 2.
0 Our First Model: The Circular-Flow Diagram  A way to organize the economic transactions/decisions of 2 decision-makers: Households Firms (businesses)
N. G R E G O R Y M A N K I W Premium PowerPoint ® Slides by Ron Cronovich 2008 update © 2008 South-Western, a part of Cengage Learning, all rights reserved.
THE ECONOMIC PROBLEM 2 CHAPTER Dr. Gomis-Porqueras ECO 680.
Copyright © 2006 Pearson Education Canada The Economic Problem 2 CHAPTER.
Production and Trade Production Possibilities, Comparative and Absolute Advantage, Specialization and Trade, Circular Flow, Invisible Hand.
© 2013 Pearson. Is wind power free? © 2013 Pearson 3 When you have completed your study of this chapter, you will be able to 1 Explain and illustrate.
© 2013 Pearson. Is wind power free? © 2013 Pearson 3 When you have completed your study of this chapter, you will be able to 1 Explain and illustrate.
Economic Models Mr. Barnett University High School AP Econ.
Chapter 2: Trade-offs, Comparative Advantage, and the Market System 1 of 30 © 2008 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony.
MICROECONOMICS Ch2 The Economic Problem Cheryl Fu.
2 The Economic Problem After studying this chapter, you will be able to:  Define the production possibilities frontier and use it to calculate opportunity.
Microeconomics ECON 2302 Spring 2011 Marilyn Spencer, Ph.D. Professor of Economics Chapter 2.
Microeconomics ECON 2302 Spring 2010 Marilyn Spencer, Ph.D. Professor of Economics Chapter 2.
Economic Models: Trade-offs and Trades
The PPF Model The economic resources nations have to produce goods and services are scarce. Decision-makers face trade-offs as the result of scarcity.
Publisher’s PowerPoint Edited for ECON1000 F & H Prof. Sam Lanfranco.
Introduction to Economics Johnstown High School Mr. Cox Production.
The Economizing Problem 2 C H A P T E R The foundation of economics is the economizing problem: society’s material wants are unlimited while resources.
The Economic Problem CHAPTER 3 C H A P T E R C H E C K L I S T When you have completed your study of this chapter, you will be able to 1 Explain and.
Scarcity and Trade-offs
Chapter 2.
Production and Trade Production Possibilities, Comparative and Absolute Advantage, Specialization and Trade, Circular Flow, Invisible Hand.
Macroeconomics ECON 2301 Summer Session 1, 2008
Managers Making Choices at BMW
© 2007 Thomson South-Western
Choice, Opportunity Costs, and Specialization
ECONOMICS : CHAPTER 2– ECONOMIC SYSTEMS AND TOOLS
Introduction to Economics
Presentation transcript:

Chapter 2

Models What is a model? Models: Simplified representation of reality to help us study and understand reality. Reality is too complicated mesh of cause and effect interactions! 2

Other Things Equal A simplified model of reality lets us focus on one cause and effect at a time. Other Things Equal Assumption: Assume that all other relevant factors remain unchanged. 3

Some Components of a Model Assumptions (how we simplify) Mathematical Equations Price = 100 – 5*Quantity Variables (can take on multiple values) Graphs 4

Three Models to Start With 1.Production Possibilities Frontier 2.Comparative Advantage 3.The Circular-Flow Model 5

1. PPF- Production Possibility Frontier Production Possibility Frontier- the model we use for analyzing the economic consequences of scarcity and the working market system. Definition- Curve showing the maximum attainable combinations of 2 products that may be produced with available resources and current technologies. Analyzes trade-offs and opportunity costs that individuals, firms, or countries face. Setup: Scarcity, Two Goods, Graph/Table 6

Main Ideas of PPF 1.Increasing marginal costs A convex or “bowed out” PPF illustrates increasing marginal costs. Increasing marginal costs occur because some workers, machines, and other resources are better suited to one use than the other. The more resources already devoted to any activity, the smaller the payoff to devoting additional resources to that activity. 7

Increasing Marginal Opportunity Cost 8

Example 6 The # of hours you have already spent studying economics, the smaller the increase in your test grade for each additional hour (and the greater the opportunity cost of using the hour in that way) ChoiceHours spend studying Midterm Score A075 B181 C286 D390 E493 F595 9

PPF Continued What We Can Learn and Demonstrate 1.Opportunity Costs, Trade-Offs (most valuable forgone alternative) 2.Efficiency, Growth, Technology 3.Comparative Advantage and Absolute Advantage 10

Which of the following best represents the tradeoff faced by BMW between producing SUVs and producing roadsters? a.Any point on the graph represents that tradeoff. b.Tradeoff B and C c.Tradeoff F and G d.Tradeoff C and G 1.1 Tradeoffs 11

Which of the following best represents the tradeoff faced by BMW between producing SUVs and producing roadsters? a.Any point on the graph represents that tradeoff. b.Tradeoff B and C c.Tradeoff F and G d.Tradeoff C and G 12

1.2 Economic Growth Economic growth is represented by shifts in the PPF. At any given point in time the resources in an economy are fixed. But over time the resources may increase (population, technology). Shifts show how economic growth can lead to more production in goods and services which raises the standard of living. Growth may lead to greater increases in production for one good than another. 13

Economic Growth: The ability of the economy to produce increasing quantities of goods and services. What factors might influence economic growth? What could cause production in all industries to rise simultaneously? 14

Example 1- Seats R US (Production choice of car seats and sofas) i.Assumptions ii.Hypothesis iii.Use economic data to test hypothesis. Seats R US Production Choices ChoiceQuantity of Car SeatsQuantity of Sofas A800 B6010 C4020 D 30 E040 15

Example 2: Brady’s Sports Emporium i.Assumptions: Brady can produce 3 footballs or 2 bats per hour. He only has 5 hours to work Hours spent producing goodsQuantity of goods made ChoiceFootballsBatsFootballsBats A50150 B41122 C3294 D2366 E1438 F

Example 3: Small Spa Inc. Assumptions: There is one room for services. Each hour the room can be used to give 1 massage or 2 facials. The spa is only open for 3 hours a day. Hours of ServiceQuantity of Services ChoiceMassageFacialsMassageFacials A3030 B2122 C1214 D

Example 4 Quantity of GunsQuantity of Grenades

1.3 Comparative Advantage (in International Trade) Comparative advantage The ability of an individual, a firm, or a country to produce a good or service at a lower opportunity cost than competitors. Absolute advantage The ability to produce more of a good or service than competitors when using the same amount of resources. Note: The basis for trade is comparative advantage not absolute advantage.

Example 5: Tiger Woods Should Tiger Woods mow his own lawn? Woods can mow his lawn for 2 hours. In the same time, he could be filming commercials for Nike and earn $1 million. OR Forrest Gump can mow the lawn in 4 hours or could McDonald’s and earn $20. Let’s compare opportunity costs. 20

Don’t Let This Happen to YOU! Remember That Trade Creates Both Winners and Losers Not all goods and services are traded internationally. Production of most goods involves increasing opportunity costs. Tastes for products differ. How Countries Gain from International Trade Why Don’t We See Complete Specialization? Does Anyone Lose as a Result of International Trade? 22

The Circular-Flow Diagram 3. The Circular Flow Model: The Market System The Circular Flow of Income 23

The Market System Labor includes all types of work, from the part-time labor of teenagers working at McDonald’s to the work of top managers in large corporations. Capital refers to physical capital, such as computers and machine tools, that is used to produce other goods. Natural resources include land, water, oil, iron ore, and other raw materials (or “gifts of nature”) that are used in producing goods. An entrepreneur is someone who operates a business. Entrepreneurial ability is the ability to bring together the other factors of production to successfully produce and sell goods and services. Factors of production are divided into four broad categories: 24

The Market System The Market Mechanism Individuals usually act in a rational, self- interested way. Adam Smith understood that people’s motives can be complex. In a famous phrase, Smith said that firms would be led by the “invisible hand” of the market to provide consumers with what they wanted. 25

Making the Connection A Story of the Market System in Action: How Do You Make an iPod? The market coordinates the activities of the many people spread around the world who contribute to the making of an iPod. 26

Property rights The rights individuals or firms have to the exclusive use of their property, including the right to buy or sell it. The Legal Basis of a Successful Market System The Market System Protection of Private Property Enforcement of Contracts and Property Rights If property rights are not well enforced, fewer goods and services will be produced. This reduces economic efficiency, leaving the economy inside its production possibilities frontier. 27