Economics trains you to. . . .

1. Economics trains you to. . . . • Think in terms of alternatives. • Evaluate the cost of individual and social choices. • Examine and understand how certain events and issues are related.

2. Every field of study has its own terminology Economics Opportunity cost Elasticity Supply Consumer Surplus Comparative advantage Deadweight loss Demand

3. The Economic Way of Thinking • Includes developing abstract models from theories and theanalysis of the models. • Uses two approaches: • Descriptive (reporting facts, etc.) • Analytical (abstract reasoning)

4. Positive versus Normative Analysis • Positive statementsare statements that describe the world as it is. • Normative statementsare statements about how the world should be.

5. ? Positive or Normative Statements? An increase in the minimum wage will cause a decrease in employment among the least-skilled. The income gains from a higher minimum wage are worth more than any slight reductions in employment. ?

6. Economic Models Economists use models to simplify reality in order to improve our understanding of the world Two of the most basic economic models include: • The Circular Flow Model • The Production Possibilities Frontier

7. The Circular-Flow Model Thecircular-flow modelis a simple way to visually show the economic transactions that occur between households and firms in the economy.

8. Revenue Spending Goods & Services sold Goods & Services bought Inputs for production Labor, land, and capital Wages, rent, and profit Income The Circular-Flow Diagram Market for Goods and Services Firms Households Market for Factors of Production

9. The Circular-Flow Diagram • Markets for Goods & Services • Firms sell • Households buy • Markets for Factors of Production • Households sell • Firms buy

10. The Circular-Flow Diagram Factors of Production • Inputs used to produce goods and services • Land, labor, and capital

11. The Production Possibilities Frontier The production possibilities frontier is a graph showing the various combinations of output that the economy can possibly produce given the available factors of production and technology.

12. D C 2,200 A 2,000 B 1,000 700 0 300 600 The Production Possibilities Frontier Quantity of Computers Produced 3,000 Quantity of Cars Produced 1,000

13. The Production Possibilities Frontier Quantity of Computers Produced D 3,000 C 2,200 A 2,000 Production possibilities frontier B 1,000 Quantity of Cars Produced 700 0 300 600 1,000

14. Concepts Illustrated by the Production Possibilities Frontier • Efficiency • Tradeoffs • Opportunity Cost • Economic Growth

15. 4,000 E 2,100 750 Quantity of Computers Produced The Production Possibilities Frontier An outward shift in the production possibilities frontier 3,000 2,000 A Quantity of Cars Produced 700 0 1,000

16. Summary • Economics relies on both positive and normative analysis. Positive statements assert how the world “is” while normative statements assert how the world “should be.” • Economists may offer conflicting advice due to differences in scientific judgments or to differences in values.

17. Revenue Spending Market for Goods and Services Goods & Services sold Goods & Services bought Firms Households Inputs for production Labor, land, and capital Market for Factors of Production Wages, rent, and profit Income The Circular-Flow Diagram

18. Quantity of Computers Produced D 3,000 C 2,200 A 2,000 B 1,000 Quantity of Cars Produced 700 0 300 600 1,000 The Production Possibilities Frontier

19. Quantity of Computers Produced D 3,000 C 2,200 A 2,000 Production possibilities frontier B 1,000 Quantity of Cars Produced 700 0 300 600 1,000 The Production Possibilities Frontier

20. Quantity of Computers Produced 4,000 An outward shift in the production possibilities frontier 3,000 E 2,100 2,000 A Quantity of Cars Produced 700 750 0 1,000 The Production Possibilities Frontier