Chapter 2: Thinking like an economist
Ch. 2: Thinking like an economist
Microeconomics versus Macroeconomics
• Microeconomics: the study of how households and firms
make decisions and how they interact in markets.
• Macroeconomics: the study of economy-wide phenomena,
including inflation, unemployment, and economic growth.
These two branches of economics are closely intertwined, yet
distinct - they address different questions.
Economics as a science:
Economists seek to both explain and improve the world.
Economist employ models, or simplified versions of the real world,
to gain understanding of complex economic questions.
Models
Not Models
Modeling an economy:
• Two types of actors: (1) “households” and (2) “firms”.
• Two types of markets: (1) goods and services and (2) factors
of production.
Factors of production: labor, land and capital (buildings,
machines).
Modeling an economy:
Households purchase goods and services by renting factors of
production (that they own) (e.g. land, labor and capital) to firms.
Firms maximize profits by using those rented factors of production
to produce and sell goods and services.
Production possibilities frontier (PPF):
Production Possibilities Frontier (PPF): a graph that shows the
combinations of two goods the economy can possibly produce
given the available resources and the available technology.
Example: An asteroid is going to hit the planet and destroy life as
we know it. NASA only has 360 days to launch a countermeasure a nuclear warhead that must be burried deep into the asteroid.
NASA needs spaceships and astronauts to complete the mission. It
takes 100 days to build a spaceship and 10 days to train an
astronaut. What is NASA’s production possibilities frontier (PPF)?
Production possibilities frontier (PPF):
Production Possibilities Frontier (PPF): a graph that shows the
combinations of two goods the economy can possibly produce
given the available resources and the available technology.
NASA’s Production Possibilities Frontier (PPF) for
spaceships and astronauts
40
30
Number of
20
astronauts
10
0
0
1
3
2
Number of spaceships
4
Production possibilities frontier (PPF):
Production Possibilities Frontier (PPF): a graph that shows the
combinations of two goods the economy can possibly produce
given the available resources and the available technology.
NASA’s Production Possibilities Frontier (PPF) for
spaceships and astronauts
40
30
Number of
20
astronauts
10
0
0
1
3
2
Number of spaceships
4
Production possibilities frontier (PPF):
Production Possibilities Frontier (PPF): a graph that shows the
combinations of two goods the economy can possibly produce
given the available resources and the available technology.
NASA’s Production Possibilities Frontier (PPF) for
spaceships and astronauts
40
(0, 36)
30
Number of
20
astronauts
10
0
0
1
3
2
Number of spaceships
4
Production possibilities frontier (PPF):
Production Possibilities Frontier (PPF): a graph that shows the
combinations of two goods the economy can possibly produce
given the available resources and the available technology.
NASA’s Production Possibilities Frontier (PPF) for
spaceships and astronauts
40
(0, 36)
30
(1, 26)
Number of
20
astronauts
10
0
0
1
3
2
Number of spaceships
4
Production possibilities frontier (PPF):
Production Possibilities Frontier (PPF): a graph that shows the
combinations of two goods the economy can possibly produce
given the available resources and the available technology.
NASA’s Production Possibilities Frontier (PPF) for
spaceships and astronauts
40
(0, 36)
30
(1, 26)
Number of
20
astronauts
(2, 16)
10
0
0
1
3
2
Number of spaceships
4
Production possibilities frontier (PPF):
Production Possibilities Frontier (PPF): a graph that shows the
combinations of two goods the economy can possibly produce
given the available resources and the available technology.
NASA’s Production Possibilities Frontier (PPF) for
spaceships and astronauts
40
(0, 36)
30
(1, 26)
PPF
Number of
20
astronauts
(2, 16)
10
(3, 6)
0
(3.6, 0)
0
1
3
2
Number of spaceships
4
Production possibilities frontier (PPF):
Production Possibilities Frontier (PPF): what is the PPF of our
class?
Consider that we each have 60 seconds of labor and can complete
multiplication problems or addition problems. What does our PPF
look like?
Labor 1:
12 x 4 =?
8 x 6 =?
3 x 7=?
Labor 2:
40+62= ?
12+13= ?
1+51= ?
Production possibilities frontier (PPF):
Production Possibilities Frontier (PPF): what is the PPF of our
class?
Consider that we each have 60 seconds of labor and can complete
multiplication problems or rhyme words. What does our PPF look
like?
What points are possible?
What points are efficient? inefficient?
PPF and opportunity cost?
Recall: the opportunity cost of an item is what must be given up
in order to obtain that item.
• Moving along a PPF involves shifting resources (e.g. labor)
from the production of one good to the other.
• Society faces a tradeoff: Getting more of one good requires
sacrificing some of the other.
• The slope of the PPF tells you the opportunity cost of one
good in terms of the other.
PPF and opportunity cost?
In Wyoming, what is the opportunity cost of an additional rodeo?
an additional swing dancing club?
Wyoming’s Production Possibilities Frontier (PPF)
for rodeos and swing dancing clubs
400
300
Number of
swing 200
dancing clubs
PPF
100
0
0
5
10
Number of rodeos
15
20
PPF and opportunity cost?
In Wyoming, what is the opportunity cost of an additional rodeo?
an additional swing dancing club?
PPF and opportunity cost?
Opportunity cost and dog breeding.
Dog breeding in Russia
Dog breeding in Mexico
100
Siberian
Huskies
100
50
0
Siberian 50
Huskies
0
0
50
Chihuahuas
100
0
50
Chihuahuas
100
PPF: Technology allows us to produce more with the same
resources.
Wyoming’s Production Possibilities Frontier (PPF) for
rodeos and swing dancing clubs: technology shock
400
Consume more dance clubs and rodeos with
same amount of resources.
300
If there is an increase in technology,
perhaps Wyoming gets better
carpenters that can build stadiums
and dance clubs more efficiently, the
PPF frontier ships outward.
Number of
swing 200
dancing clubs
100
0
0
5
10
Number of rodeos
15
20