Principles of Microeconomics

N.
GREGORY MANKIW
PRINCIPLES OF
MICROECONOMICS
Eight Edition
CHAPTER Thinking Like an Economist

Topic: The Economist as a Scientist
2
© 2018 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed
with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use. 1
Learning Objectives
By the end of this chapter, students understand:

• How economists apply the methods of science.
• The circular flow and the production possibilities frontier.
• Microeconomics and macroeconomics.
• The difference between positive and normative statements.
• Why economists sometimes disagree.
© 2018 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed 2
with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.
Contents
1. Link youtube
2. Economists follow the scientific method
3. The circular flow
4. PPF ( Production possibilities frontier )
5. Discussion group
6. Question & Answer
1. Link youtube
• https://www.youtube.com/watch?v=J8449HgS3FM
• Economists play two roles:

1. Scientists: try to explain the world
2. Policy advisors: try to improve it
• As scientists, economists employ the
scientific method
– Dispassionate development and testing of theories
about how the world works
• Assumptions
– Simplify the complex world and make it easier to
understand
– Example: to study international trade,
assume two countries and two goods
• Economists use models to study economic
issues
– Highly simplified representation of
a more complicated reality
• Examples of models:
– The model teeth at the dentist’s office
– A model of human anatomy from high
school biology class
Don’t forget
– A road map to floss!
©ittipon/Shutterstock.com
wavebreakmedia/Shutterstock.com
©Accord/Shutterstock.com
3. Circular-flow diagram
• Circular-flow diagram
– Visual model of the economy
– Shows how dollars flow through markets among
households and firms
• Two decision makers
– Firms and Households
• Interacting in two markets
– Market for goods and services
– Market for factors of production (inputs)
Figure 1 The circular flow
Households:
 Own the factors of production,
sell/rent them to firms for income
 Buy and consume goods & services
Households
Firms
Firms:
 Buy/hire factors of production,
use them to produce goods and
services
 Sell goods & services
Figure 1 The circular flow
Revenue Spending
Markets for
G&S Goods &
G&S
sold Services bought
Firms Households
Factors of Labor, land,

production Markets for capital
Factors of
Wages, rent, Production Income
profit
11
4. The PPF
• Production possibilities frontier

– A graph: combinations of output that the economy
can possibly produce
– Given the available
• Factors of production and technology
– Example:
• Two goods: computers and wheat
• One resource: labor (measured in hours)
• Economy has 50,000 labor hours per month available
for production
PPF Example
Producing one computer requires 100 hours labor.
Producing one ton of wheat requires 10 hours labor.
Employment of
Production
labor hours
Computers Wheat Computers Wheat
A 50,000 0 500 0
B 40,000 10,000 400 1,000
C 25,000 25,000 250 2,500
D 10,000 40,000 100 4,000
E 0 50,000 0 5,000
PPF Example
Wheat
Production (tons)
Point
on Com- 6,000
graph puters Wheat E
5,000
4,000
D
A 500 0
B 400 1,000 3,000 C
C 250 2,500 2,000
1,000
B
D 100 4,000
A
E 0 5,000 0
0 100 200 300 400 500 600
Computers
Q&A
On the graph above, find the point that represents
(100 computers, 3000 tons of wheat), label it F.
– Would it be possible for the economy to produce
this combination of the two goods?
Why or why not?
Next, find the point that represents (300 computers,
3500 tons of wheat), label it G.
– Would it be possible for the economy to produce
this combination of the two goods?
Answers
• Point F: 100 Wheat
computers, 3000 (tons)
tons wheat 6,000
• Requires 40,000 5,000
hours of labor 4,000
• Possible but not 3,000
efficient: could get F
2,000
more
of either good 1,000
without sacrificing 0
any of the other 0 100 200 300 400 500 600
Computers
Answers
• Point G: 300 Wheat
computers, 3500 (tons)
tons wheat 6,000
• Requires 65,000 5,000
hours of labor. 4,000
• Not possible G
3,000
because the
2,000
economy only has
50,000 hours 1,000
0
0 100 200 300 400 500 600
Computers
4.1. The PPF: What We Know So Far
• Points on the PPF (like A – E): possible

– Efficient: all resources are fully utilized
• Points under the PPF (like F): possible
– Not efficient: some resources are underutilized
(e.g., workers unemployed, factories idle)
• Points above the PPF (like G)
– Not possible
4.1. The PPF: What We Know So Far
• Moving along a PPF

– Involves shifting resources 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
– The opportunity cost of one good in terms of the
other
The PPF and Opportunity Cost
Wheat The slope of a line

(tons)
–1000
equals the “rise over
6,000 slope = = –10 the run.”
100
5,000
4,000
3,000
2,000
Opportunity cost of
1 computer =
1,000
10 tons of wheat.
0
0 100 200 300 400 500 600
Computers
4.2. The Shape of the PPF
• Shape of the PPF

– Straight line: constant opportunity cost
• Previous example: the opportunity cost of 1 computer is
10 tons of wheat
– Bowed outward: increasing opportunity cost
• As more units of a good are produced, we need to give
up increasing amounts of the other good produced
Why the PPF Might Be Bowed Outward
As the economy
Beer
shifts resources from

beer to mountain
bikes:
PPF becomes steeper
and the opportunity

cost of mountain
Mountain bikes increases.
Bikes
Beer At A, opportunity cost At point A, most
A of mountain bikes is
low. workers are
producing beer, even
those who are better
suited to building
bikes.
So, do not have to

give up much beer
to get more bikes.
Mountain
Bikes
Beer At B, most workers are
A producing bikes.
The few left in beer
production are the best
B
brewers.
Producing more bikes

At B, opportunity
cost of mountain would require shifting
bikes is high. some of the best
brewers away from
Mountain beer production
Bikes causing a big drop in
beer output.
4.3. Why the PPF Might Be Bowed
Outward
• The PPF is bowed outward when:
– Different workers have different skills
– Different opportunity costs of producing one good
in terms of the other
– There is some other resource, or mix of resources
with varying opportunity costs
• E.g., different types of land suited for different uses
5. Discussion group
• Draw a circular-flow diagram. Identify the parts

of the model that correspond to the flow of
goods and services and the flow of dollars for
each of the following activities.
– Sam pays a storekeeper $1 for a quart of milk.
– Sally earns $4.50 per hour working at a fast food
restaurant.
– Serena spends $7 to see a movie.
– Stuart earns $10,000 from his 10 percent ownership
of Acme Industrial.
26
27
• What are economists’ two roles? How do they differ?
• What are models? How do economists use them?
• What are the elements of the Circular-Flow Diagram?
What concepts does the diagram illustrate?
• How is the Production Possibilities Frontier related to
opportunity cost? What other concepts does it illustrate?
28
N. GREGORY MANKIW
PRINCIPLES OF
MICROECONOMICS
Eight Edition
CHAPTER Thinking Like an Economist

Topic: Exercises &
2 The Economist as Policy Adviser
Instructor: Nguyen Thi My My
Email: [email protected]
Contents
1. Exercise
2. Positive versus Normative Analysis
3. Why Economists Disagree
4. Q & A
5. Discussion Group
6. Link youtube
1. Exercise
In which country is the opportunity cost of
cloth lower?
FRANCE ENGLAND
Wine Wine
600 600
500 500
400 400
300 300
200 200
100 100
0 0
0 100 200 300 400 0 100 200 300 400
Cloth Cloth
1. Exercise - Answers
England, because its PPF is not as steep as France’s
FRANCE ENGLAND
Wine Wine
600 600
500 500
400 400
300 300
200 200
100 100
0 0
0 100 200 300 400 0 100 200 300 400
Cloth Cloth
Economic Growth and the PPF
With additional Wheat

resources or an (tons)
Economic
improvement in 6,000
growth shifts
technology, 5,000 the PPF
the economy can 4,000 outward.
produce more computers, 3,000
2,000
more wheat,
1,000
or any combination in 0
0 100 200 300 400 500 600
between.
Computers
34
2. Positive versus Normative Analysis
• Positive statements: descriptive

– Attempt to describe the world as it is
– Confirm or refute by examining evidence:
“Minimum-wage laws cause unemployment”
• Normative statements: prescriptive
– Attempt to prescribe how the world should be:
“The government should raise the minimum wage”
3. Why Economists Disagree
• Economists often give conflicting policy advice

– Can disagree about the validity of alternative
positive theories about the world
– May have different values and, therefore, different
normative views about what policy should try to
accomplish
Which of these statements are “positive” and which are
“normative”? How can you tell the difference?
a. Prices rise when the government increases the
quantity of money.
b. The government should print less money.
c. A tax cut is needed to stimulate the economy.
d. An increase in the price of burritos will cause an
increase in consumer demand for music downloads.
a. Prices rise when the government increases the
quantity of money.
Positive – describes a relationship, could use data to
confirm or refute.
b. The government should print less money.

Normative – this is a value judgment, cannot be
confirmed or refuted.
5. DISCUSSION GROUP
Ticket Resale
“Laws that limit the resale of tickets for entertainment
and sports events make potential audience members
for those events worse off on average.”
40
6. Link Youtube
https://www.youtube.com/watch?v=3hv8tH0eC9g

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N.

CHAPTER Thinking Like an Economist

By the end of this chapter, students understand:

• Economists play two roles:

Factors of Labor, land,

• Production possibilities frontier

• Points on the PPF (like A – E): possible

• Moving along a PPF

Wheat The slope of a line

• Shape of the PPF

shifts resources from

PPF becomes steeper

and the opportunity

So, do not have to

Producing more bikes

• Draw a circular-flow diagram. Identify the parts

CHAPTER Thinking Like an Economist

With additional Wheat

• Positive statements: descriptive

• Economists often give conflicting policy advice

b. The government should print less money.

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