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MICROECONOMICS BU 224

MICROECONOMICS BU 224. Seminar Two. Agenda. Course Issues and Questions Models Production Possibilities Curve Comparative Advantage Circular Flow Positive and Normative Economics Review of Questions from the Text Homework. What is an economic model?.

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MICROECONOMICS BU 224

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  1. MICROECONOMICSBU 224 Seminar Two

  2. Agenda • Course Issues and Questions • Models • Production Possibilities Curve • Comparative Advantage • Circular Flow • Positive and Normative Economics • Review of Questions from the Text • Homework

  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 thescientific method? • Problem identification • Model development • Testing a theory

  6. Identify the problem Develop a model basedon 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 are resources? The basic categories of inputs used to produce goods and services

  10. What are the three categories of resources? Land Labor Capital

  11. What is aland resource? A shorthand expression for any natural resource provided by nature

  12. What is labor? The mental and physical capacity of workers to produce goods and services

  13. What is capital? The physical plants, machinery, and equipment used to produce other goods, they do not directly satisfy human wants

  14. What isfinancial capital? The money used to purchase capital. Financial capital by itself is not productive, it is a paper claim on capital

  15. What is entrepreneurship? Creative labor of individuals that enables them to seek profits by combining resources

  16. Labor Land Capital Entrepreneurship organizes resources to produce goods and services

  17. 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

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

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

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

  21. Economic growth Technological advance

  22. Technological Advance Computers Pizzas

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

  24. On average, households in China save 40 percent of their annual income each year, whereas households in the United States save less than 5 percent. Production possibilities are growing at roughly 9 percent annually in China and 3.5 percent in the United States. Use graphical analysis of “present goods” versus “future goods” to explain the differences in growth rates

  25. Comparative vs. absolute advantage • Comparative advantage: the opportunity cost of producing the good is lower for that individual than for other people. • Absolute advantage: if he or she can do it better than other people. • Careful: Don’t confuse comparative advantage with absolute advantage!

  26. Comparative Advantage and Gains from TradeEx.: Tom and Hank

  27. Tom and Hank’s Opportunity Costs of Fish and Coconuts Both castaways are better off when they each specialize in what they are good at and trade.

  28. Specialize and Trade

  29. The Circular Flow System • RESOURCE • MARKET • Households sell • Businesses buy Costs Rent, Wages, Interest, Profits Land, Labor, Capital, Entrepreneur Land, Labor, Capital, Entrepreneur • BUSINESSES • buy resources • sell products • HOUSEHOLDS • sell resources • buy products Goods and Services Goods and Services • PRODUCT • MARKET • Businesses sell • Households buy Consumption Expenditures Revenues LO5 2-31

  30. What ispositive economics? An analysis limited to statements that are verifiable

  31. What isnormative economics? An analysis based on value judgement

  32. 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.

  33. Unit Two Homework Questions St Atanagio is a remote island in the Atlantic. The inhabitants grow corn and breed poultry. The accompanying table shows the maximum annual output combinations of corn and poultry that can be produced. Obviously, given their limited resources and available technology, as they use more of their resources for corn production, there are fewer resources available for breeding poultry. a. Draw a production possibility frontier with corn on the horizontal axis and poultry on the vertical axis illustrating these options, showing points 1–7.

  34. Unit Two Homework Questions 2. Can St. Atanagio produce 650 pounds of poultry and 650 pounds of corn? Explain. Where would this point lie relative to the production possibility frontier? 3. What is the opportunity cost of increasing the annual output of corn from 800 to 1000 pounds? 4. What is the opportunity cost of increasing the annual output of corn from 200 to 400 pounds? 5.Can you explain why the answers to parts 3. and 4. above are not the same? What does this imply about the slope of the production possibility frontier?

  35. Microeconomics Questions?

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