1. MICROECONOMICS BU 224
Seminar
Two

2. Agenda Course Issues and Questions Models
Production Possibilities Curve
Positive and Normative Economics
Review of Questions from the Text
Where are we going next?

3. What is an economic model?
A simplified description of reality used to understand and predict the relationships between variables

4. What is the purpose of an economic model?
To forecast or predict the results of various changes in variables

5. What is the scientific method?
Problem identification
Model development
Testing a theory

6. Develop a model based on simplified assumptions
Identify the problem
Develop a model based on simplified assumptions
Test the model and formulate a conclusion

7. What conclusion can we make?
If the evidence supports the model, the conclusion is to accept the model. If not, the model is rejected

8. What is the difference between association and causation?
We cannot always assume that when one event follows another, the first caused the second

9. 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

10. What is technology?
The body of knowledge and skills applied to how goods are produced

11. What assumptions underlie the productions possibilities model?
Fixed resources
Fully employed resources
Technology unchanged

12. 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

13. What is economic growth?
The ability of an economy to produce greater levels of output, an outward shift of its production possibilities curve

14. Economic
growth
Technological
advance

15. Technological Advance
Computers
Pizzas

16. What is the conclusion of the production possibilities curve?
Scarcity limits an economy to points on or below its production possibilities curve

17. What is positive economics?
An analysis limited to statements that are verifiable

18. What is normative economics?
An analysis based on value judgement

19. 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.

20. 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

21. 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)

22. Microeconomics
Questions?