1、1AP EconomicsChapter 2 The Discipline of Economics-By Jacinda Jia2Topic List What is economicsMicro vs.MacroeconomicsPositive vs.normative economicsOpportunity costProduction possibilities frontierComparative advantage3Economics definedEconomics is a social science that studies how resources are use
2、d and is often concerned with how resources can be used to their fullest potential.Consider the case of a student who has only 24 hrs to spend each day.One problem every student faces is just how much time should be allocated to each of the various activities that make for a full life.This is an eco
3、nomic problem,since the student must decide how the resource(time)will be used to its maximum potential.4Economics definedThe discipline of economics is not directly concerned with money or politics or the stock market,however economic problems abound in each of these areas.1.People want to spend th
4、eir money in the best way.2.Politicians want to make decisions to achieve the maximum benefit.3.Investors want the highest return from their earnings.Any time someone is trying to make the most out of what he has,we are in the realm of economics.5Macroeconomics vs.MicroeconomicsMicroeconomics The st
5、udy of how households and businesses make choices,how they interact in markets,and how the government attempts to influence their choices.Macroeconomics The study of the economy as a whole,including topics such as inflation,unemployment,and economic growth.6Macroeconomics vs.Microeconomics?I:The eff
6、ect of higher cigarette taxes on the quantity of cigarettes sold.A:The effect of higher income taxes on the total amount of consumer spending.A:The reasons for the economics of East Asian countries growing faster than the economies of sub-Saharan African countries.I:The reasons for low rates of prof
7、it in the airline industry.7Normative and Positive EconomicsThe discipline of economics can be split in another way-positive and normative economics.Positive economics is based on the scientific method,and is concerned with what is.Normative economics involves value judgments,and is concerned with w
8、hat ought to be.8Normative and Positive EconomicsIt may appear as if positive economics is a superior form of the discipline since it is grounded in the scientific method and normative economics is based on opinions.However,normative economics is a crucial part of the economics discipline.Any scient
9、ific study will require an experiment,and experiments can be designed to highlight a scientists prejudices.Even if an economist can keep his biases out of a study,why did he choose this particular question to investigate?However much economists strive to be like biologists and physicists,there will
10、always be a large normative aspect.9Normative and Positive Economics/Analysis?A 50-cent-per-pack tax on cigarettes will reduce smoking by teenagers by 12%.The federal government should spend more on AIDs research.Rising paper prices will increase textbook prices.The price of coffee at Starbucks is t
11、oo high.10ResourcesA resource is anything that can be used to produce a good or service.In Macroeconomics every resource is classified into one of three categories:1.Land2.Labor3.Capital11Opportunity Cost Opportunity Cost The highest-valued alternative that must be given up in order to engage in an
12、activity.It is what must be sacrificed to obtain something.P14 table 2.112Production Possibilities FrontierProduction possibilities frontier A curve showing all the attainable combinations of two products that may be produced with available resources.13Production Possibilities FrontierGraphing the P
13、roduction Possibilities Frontier2-1BMWs Production Possibilities Frontier14Drawing a Production Possibilities Frontier for Rosies Boston Bakery2-1LEARNING OBJECTIVE1Hours Spent MakingQuantity MadeChoiceCakesPiesCakesPiesA5050B4142C3234D2326E1418F0501015Production Possibilities FrontierTwo factors ca
14、use the PPF to SHIFT:1.Changes in the amount of resources in the economy 2.Changes in technology and productivity16Production Possibilities Frontiers ShiftEconomic Growth The ability of the economy to produce increasing quantities of goods and services.2-3Economic Growth17Law of increasing costsThe
15、PPF is not typically a straight line.Opportunity cost will not be constant in the real world.The law of increasing costs states that as more of a product is produced,the opportunity cost increases.Refer to Table2.2-p1718Law of increasing costsThe PPF is not typically a straight line.Opportunity cost
16、 will not be constant in the real world.Refer to Next Slide!19Production Possibilities FrontiersIncreasing Marginal Opportunity Costs2-2As the economy moves down the production possibilities frontier,it experiences increasing marginal opportunity costs because increasing automobile production by a g
17、iven quantity requires larger and larger decreases in aircraft carrier production.More funds for tsunami relief meant less funds for other charities.Trade-offs and Tsunami Relief2-120Law of increasing costsThe law of increasing costs states that as more of a product is produced,the opportunity cost
18、increases.Refer to Table2.2-p1721Law of increasing costsThe more of a product that is initially being produced,the higher the opportunity cost will be to produce more.Concave-to-the-origin PPF is due to the law of increasing costsRefer to fig2.3-p1822Law of Increasing Costs-CausesWhen gun production
19、 is low,the opportunity cost of increasing gun production is low.When gun production is increased,the resources that are adept at making guns can be shifted off the farm and into gun production-not much butter will be lost,but many more guns are produced.The opportunity cost of guns is low when a lo
20、w level of guns is being produced.23Law of Increasing Costs-CausesHowever:Imagine the situation in an economy that is already producing a lot of guns.When the resources are shifted from butter to gun production,not many more guns are produced,but a lot of butter must be sacrificed.24Law of Increasin
21、g Costs-CausesSummaryIt is due to the fact that some resources are more adept at the production of one good than another.When resources are forced to work in an industry where they are not proficient,they are less productive.Thus,the opportunity cost of producing a good becomes greater as more resou
22、rces are forced into the industries where they are not as productive.This causes the PPF to be concave to the origin.25Law of Increasing Costs-CausesThe idea of increasing marginal opportunity costs illustrates an important economic concept:the more resources already devoted to any activity,the smal
23、ler the payoff to devoting additional resources to that activity.26Illustration 1:The more hours you have already spent studying economics,the smaller the increase in your test grade from each additional hour you spend and the greater the opportunity cost of using the hour in that way.27Illustration
24、 2:The more funds a firm has devoted to R&D during a given year,the smaller the amount of useful knowledge it receives from each additional dollar -and the greater the opportunity cost of using the funds in that way.28ExerciseP26 Free-Response Questions29Comparative AdvantageComparative advantage Th
25、e ability of an individual,business,or country to produce a good or service at the lowest opportunity cost.Opportunity Cost The highest-valued alternative that must be given up to engage in an activity.Eg:Table 2.4-p2030Absolute advantage The ability to produce more of a good or service than competi
26、tors when using the same amount of resources.Eg:Table 2.3-p19Portugal has the absolute advantage in producing both products31Comparative Advantage in International Trade32Comparative Advantage in International Trade1.The basis for trade is comparative advantage,not absolute advantage.2.A country has
27、 a comparative advantage in the production of the good for which it has a lower opportunity cost.3.To enjoy the gains from trade,a country should specialize in the production of the good for which it has a comparative advantage.33Comparative Advantage in International TradeAn Example of Japanese Wor
28、kers Being More Productive than American Workers8 1OUTPUT PER HOUR OF WORKCELL PHONESMP3 PLAYERSJapanUnited States12264OPPORTUNITY COSTSCELL PHONESMP3 PLAYERSJapanUnited States0.5 MP3 2 MP32 cell phones0.5 cell phoneThe Opportunity Costs of Producing Cell Phones and MP3 Players8 234Autarky A situati
29、on in which a country does not trade with other countries.35The Gains from TradeIncreasing Consumption through TradeTerms of Trade The ratio at which a country can trade its exports for imports from other countries.Production without Trade8 3WITHOUT TRADEPRODUCTION AND CONSUMPTIONCELL PHONESMP3 PLAY
30、ERSJapanUnited States9,0001,5001,5001,00036Increasing Consumption through TradeThe Gains from Trade for Japan and the United StatesWITHOUT TRADEProduction and ConsumptionCELL PHONESMP3 PLAYERSCELL PHONESJapan9,0001,500United States1,5001,000WITH TRADEProduction with TradeTradeConsumption with TradeC
31、ELL PHONESMP3 PLAYERSMP3 PLAYERSCELL PHONESMP3 PLAYERSJapan12,0000Export 1,500Import 1,50010,5001,500United States04,000Import 1,500Export 1,5001,5002,500GAINS FROM TRADEIncreased ConsumptionJapan1,500 Cell PhonesUnited States1,500 MP3 PlayersThe increased consumption made possible by trade represen
32、ts the gains from trade.and export some of that good in exchange for the good the other country has a comparative advantage in producing.With trade,the United States and Japan specialize in the good they have a comparative advantage in producing.37The Gains from TradeWhy Dont We See Complete Special
33、ization?Not all goods and services are traded internationally.?Production of most goods involves increasing opportunity costs.?Tastes for products differ.Remember that Trade Creates Both Winners and Losers38Where Does Comparative Advantage Come From?Among the main sources of comparative advantage are the following:?Climate and natural resources?Relative abundance of labor and capital?Technology?Ex
