1. Copyright © 2004 South-Western/Thomson Learning Economic Models Economics trains you to.... Think in terms of alternatives. Evaluate the cost of individual and social choices. Understand how certain events and issues are related. Economists use models to simplify reality in order to improve our understanding of the world Our first economic model…. The Production Possibilities Frontier

2. Copyright © 2004 South-Western/Thomson Learning The Production Possibilities Frontier The production possibilities frontier (PPF) is a graph that shows the combinations of output that the economy can possibly produce given the available factors of production and the available production technology.

3. The Production Possibilities Frontier Copyright©2003 Southwestern/Thomson Learning Production possibilities frontier A B C Quantity of Cars Produced 2,200 600 1,000 300 0 700 2,000 3,000 1,000 Quantity of Computers Produced D

4. Copyright © 2004 South-Western/Thomson Learning Our Second Model: The Production Possibilities Frontier Concepts Illustrated by the Production Possibilities Frontier Scarcity Efficiency Tradeoffs Opportunity Cost Economic Growth

5. Wheat or Oranges?

6. Copyright © 2004 South-Western/Thomson Learning An Aging America and the PPF The average age of Americans will rise significantly as the elderly make up a larger and larger share of the total population: Suppose the US economy can produce two goods, medical care and food. Draw a PPF and a possible production point representing the original situation before the average age of the US population has begun to increase. Now draw another possible point representing the change that may occur as the population ages.

7. Copyright © 2004 South-Western/Thomson Learning An Aging America and the PPF

8. Copyright © 2004 South-Western/Thomson Learning Microeconomics and Macroeconomics Microeconomics focuses on the individual parts of the economy. How households and firms make decisions and how they interact in specific market settings. Macroeconomics looks at the economy as a whole. Economy-wide phenomena, including inflation, unemployment, and economic growth. See Practice Worksheet

9. Copyright © 2004 South-Western/Thomson Learning The Power of Economics Economists try to explain the world (scientists). Positive economic analysis describes what is, descriptive analysis, scientific method, objective. Economists try to change the world (policy). Normative economic analysis describes what should be, prescriptive analysis, policy recommendation, subjective. See Practice Worksheet

10. Copyright © 2004 South-Western/Thomson Learning Positive or Normative? U.S. spending on healthcare is rising faster than Gross Domestic Product (GDP). The U.S. should spend less on healthcare. POSITIVE VERSUS NORMATIVE ANALYSIS ? ?

11. Copyright © 2004 South-Western/Thomson Learning Positive or Normative? Enacting price controls on prescription drugs will result in fewer new/innovative drugs being developed. The U.S should not enact price regulations to control the cost of prescription drugs. POSITIVE VERSUS NORMATIVE ANALYSIS ? ?

12. Copyright © 2004 South-Western/Thomson Learning ECONOMISTS DISAGREE They may disagree about the validity of alternative positive theories on how the world works. They may have different normative views about what policies to pursue and what policies should try to accomplish. But all economists agree on two things…..

13. Copyright © 2004 South-Western/Thomson Learning ECONOMISTS AGREE Good normative policy prescriptions must be based on sound positive economic analysis. And……