Micro Econ Chp. 2 Thinking Like An Economist

a simplified representation of some aspect of the economy. An economic model is a simplified representation of some aspect of the economy. Because including every detailed, realistic aspect of an economy would result in something that isn't tractable and informative, economists use models to learn about the world. Just as an airplane model does not include all of the interior details of a plane, an economist's model does not include every feature of the economy. See Section: Economic Models.

households are sellers, and firms are buyers. The circular-flow diagram simplifies the economy by including only two types of decision makers: firms and households. Firms produce goods and services using inputs, such as labor, land, and capital. These inputs are called the factors of production. Households own the factors of production and consume all the goods and services that the firms produce. Therefore, in the markets for the factors of production, households are sellers, and firms are buyers. See Section: Our First Model: The Circular-Flow Diagram.

feasible, but not efficient. The production possibilities frontier is a graph that shows the various combinations of output that the economy can possibly produce given the available factors of production and production technology. Because resources are scarce, not every conceivable outcome is feasible. With the resources it has, the economy can produce at any point on or inside the production possibilities frontier, but it cannot produce at points outside the frontier. An outcome is said to be efficient if the economy is getting all it can from the scarce resources it has available. Points on (rather than inside) the production possibilities frontier represent efficient levels of production. See Section: Our Second Model: The Production Possibilities Frontier.

move the economy along the production possibilities frontier. the production possibilities frontier is a graph that shows the various combinations of output that the economy can possibly produce given the available factors of production and production technology. In this case, the trade-off between producing hot dogs and hamburgers doesn't change, because resources remain the same. However, the consumption point along the production possibilities frontier has changed, because consumers now prefer to consume more hot dogs. This is represented by a movement along the production possibilities frontier to a point with more hot dog production and less hamburger production. See Section: Our Second Model: The Production Possibilities Frontier.

the influence of the government budget deficit on economic growth. Microeconomics is the study of how households and firms make decisions and how they interact in specific markets. Macroeconomics is the study of economy-wide phenomena. Therefore, the influence of the government budget deficit on economic growth is a macroeconomic topic, while the others are all microeconomic topics. See Section: Microeconomics and Macroeconomics.

Law X will reduce national income. Positive statements are descriptive; they make a claim about how the world is. However, normative statements are prescriptive; they make a claim about how the world ought to be. Therefore, in this case, the only positive statement is law X will reduce national income because it states what will happen if something is done rather than what should be done. See Section: Positive versus Normative Analysis.

is a graph that shows the various combinations of output that the economy can possibly produce given the available factors of production and production technology. In this case, the production possibilities frontier has a bowed shape because the opportunity cost of butter in terms of the number of guns is not constant. When the economy is using most of its resources to make guns, such as at point B, the resources best suited to butter production, such as farmers and cows, are being used in the weapons industry. Because these resources probably aren't very good for making guns, increasing butter production by one unit will cause only a slight reduction in the number of guns produced. At point B, the opportunity cost of butter in terms of guns is small, and the frontier is relatively flat. By contrast, when the economy is using most of its resources to make butter, such as at point C, the resources best suited to making butter are already at work in the butter industry. Producing additional butter means moving some of the best gun makers out of the weapons industry and turning them into farmers. As a result, producing additional butter will mean a substantial loss of gun output. The opportunity cost of butter is high, and the frontier is steep. See Section: Our Second Model: The Production Possibilities Frontier.

Because resources are scarce, not every conceivable outcome is feasible. With the resources it has, the economy can produce at any point on or inside the production possibilities frontier, but it cannot produce at points outside the frontier. Therefore, points A, B, and C are feasible, but point D is impossible for the economy to achieve.

An outcome is said to be efficient if the economy is getting all it can from the scarce resources it has available. Points on (rather than inside) the production possibilities frontier represent efficient levels of production. In this case, point A is feasible but inefficient, since it lies inside the production possibilities frontier. See Section: Our Second Model: The Production Possibilities Frontier.

are descriptive; they make a claim about how the world is

are prescriptive; they make a claim about how the world ought to be.