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Embeds 0 No embeds. No notes for slide. Principles of economics 7th edition gregory mankiw solutions manual 1. Chapter 1 introduced ten principles of economics that will be revisited throughout the text. Chapter 2 develops how economists approach problems while Chapter 3 will explain how individuals and countries gain from trade.

The purpose of Chapter 2 is to familiarize students with how economists approach economic problems. With practice, they will learn how to approach similar problems in this dispassionate systematic way.

They will see how economists employ the scientific method, the role of assumptions in model building, and the application of two specific economic models.

Students will also learn the important distinction between two roles economists can play: as scientists when we try to explain the economic world and as policymakers when we try to improve it. Like all scientists, they make appropriate assumptions and build simplified models to understand the world around them. Two simple economic models are the circular-flow diagram and the production possibilities frontier. The field of economics is divided into two subfields: microeconomics and macroeconomics.

Microeconomists study decision making by households and firms and the interaction among households and firms in the marketplace. Macroeconomists study the forces and trends that affect the economy as a whole. A positive statement is an assertion about how the world is. A normative statement is an assertion about how the world ought to be. When economists make normative statements, they are acting more as policy advisers than as scientists.

Economists who advise policymakers sometimes offer conflicting advice either because of differences in scientific judgments or because of differences in values. At other times, economists are united in the advice they offer, but policymakers may choose to ignore the advice because of the many forces and constraints imposed by the political process. The Economist as Scientist A. Economists Follow the Scientific Method.

Observations help us to develop theory. Data can be collected and analyzed to evaluate theories. Using data to evaluate theories is more difficult in economics than in physical science because economists are unable to generate their own data and must make do with whatever data are available. Thus, economists pay close attention to the natural experiments offered by history.

Assumptions Make the World Easier to Understand. Example: to understand international trade, it may be helpful to start out assuming that there are only two countries in the world producing only two goods. Once we understand how trade would work between these two countries, we can extend our analysis to a greater number of countries and goods. One important role of a scientist is to understand which assumptions one should make.

Economists often use assumptions that are somewhat unrealistic but will have small effects on the actual outcome of the answer. Point out how unrealistic it is. For example, it does not show where all of the stop signs, gas stations, or restaurants are located. It assumes that the earth is flat and two-dimensional. But, despite these simplifications, a map usually helps travelers get from one place to another.

Thus, it is a good model. Most economic models are composed of diagrams and equations. The goal of a model is to simplify reality in order to increase our understanding. This is where the use of assumptions is helpful. Definition of circular-flow diagram: a visual model of the economy that shows how dollars flow through markets among households and firms.

This diagram is a very simple model of the economy. Note that it ignores the roles of government and international trade. There are two decision makers in the model: households and firms. There are two markets: the market for goods and services and the market for factors of production. Firms are sellers in the market for goods and services and buyers in the market for factors of production.

Households are buyers in the market for goods and services and sellers in the market for factors of production. The inner loop represents the flows of inputs and outputs between households and firms. The outer loop represents the flows of dollars between households and firms. Definition of production possibilities frontier: 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.

Spend more time with this model than you think is necessary. Be aware that the math and graphing skills of many of your students will be limited. It is important for the students to feel confident with this first graphical and mathematical model. Be deliberate with every point. If you lose them with this model, they may be gone for the rest of the course.

Example: an economy that produces two goods, cars and computers. If all resources are devoted to producing cars, the economy would produce 1, cars and zero computers. If all resources are devoted to producing computers, the economy would produce 3, computers and zero cars.

More likely, the resources will be divided between the two industries, producing some cars and some computers. The feasible combinations of output are shown on the production possibilities frontier. This will help students to realize that a new production possibilities frontier occurs for each period. Thus, the axes show the levels of output per period. Points on a production possibilities frontier can be shown in a table or a graph: A B C D E mp3 Players 0 Music Downloads 70, 60, 45, 25, 0 The production possibilities frontier should be drawn from the numbers above.

Students should be asked to calculate the opportunity cost of increasing the number of mp3 players produced by between 0 and between and between and between and 7.

Because resources are scarce, not every combination of computers and cars is possible. It is useful to point out that the production possibilities frontier depends on two things: the availability of resources and the level of technology. Production is efficient at points on the curve such as A and B. This implies that the economy is getting all it can from the scarce resources it has available.

There is no way to produce more of one good without producing less of another. Production at a point inside the curve such as D is inefficient. This means that the economy is producing less than it can from the resources it has available. If the source of the inefficiency is eliminated, the economy can increase its production of both goods.

The production possibilities frontier reveals Principle 1: People face trade-offs. Suppose the economy is currently producing cars and 2, computers. To increase the production of cars to , the production of computers must fall to 2, Principle 2 is also shown on the production possibilities frontier: The cost of something is what you give up to get it opportunity cost. The opportunity cost of increasing the production of cars from to is computers.








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