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PRINCIPLES OF
FOURTH EDITION
N. G R E G O R Y M A N K I W
PowerPoint® Slides
by Ron Cronovich
A road map
A model of human
anatomy from high
school biology class
A model airplane
Households:
Households:
own
own the
the factors
factors of
of production,
production,
sell/rent
sell/rent them
them to
to firms
firms for
for income
income
buy
buy and
and consume
consume goodsgoods & & services
services
Firms Households
Firms Households
Firms:
Firms:
buy/hire
buy/hire factors
factors of
of production,
production,
use
use them
them toto produce
produce goods
goods
and
and services
services
sell
sell goods
CHAPTER
goods &
& services
services
2 THINKING LIKE AN ECONOMIST 12
FIGURE 1: The Circular-Flow Diagram
Revenue Spending
Markets for
G&S Goods &
G&S
sold Services bought
Firms Households
17
ACTIVE LEARNING 1:
Answers
Wheat
Point F: (tons)
100 computers, 6,000
3000 tons wheat
5,000
19
The PPF: What We Know 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 underutilized
(e.g., workers unemployed, factories idle)
Points above the PPF (like G)
• not possible
500 500
400 400
300 300
200 200
100 100
0 0
0 100 200 300 400 0 100 200 300 400
Cloth Cloth
23
A C T I V E L E A R N I N G 2:
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
24
Economic Growth and the PPF
With additional Wheat
resources or an (tons) Economic
Economic
6,000 growth
growth shifts
shifts
improvement in
5,000 the
the PPF
PPF
technology, outward.
outward.
the economy can 4,000
produce more 3,000
computers, 2,000
more wheat, 1,000
or any combination 0
in between. 0 100 200 300 400 500 600
Computers
As the economy
Beer
shifts resources
from beer to
mountain bikes:
• PPF becomes
steeper
• opp. cost of
mountain bikes
increases
Mountain
Bikes
CHAPTER 2 THINKING LIKE AN ECONOMIST 27
Why the PPF Might Be Bow-Shaped
At point A, At
At A,
A, opp.
opp. cost
cost of
of
Beer
A mtn
mtn bikes
bikes is
is low.
low.
most workers are
producing beer,
even those that
are better suited
to building
mountain bikes.
So, do not have to
give up much beer
to get more bikes. Mountain
Bikes
CHAPTER 2 THINKING LIKE AN ECONOMIST 28
Why the PPF Might Be Bow-Shaped
Beer
At
At B,
B, opp.
opp. cost
cost
producing bikes.
of
of mtn
mtn bikes
bikes
The few left in beer are
is
is high.
high.
the best brewers.
Producing more bikes B
would require shifting
some of the best
brewers away from
beer production,
would cause a big drop
in beer output. Mountain
Bikes
CHAPTER 2 THINKING LIKE AN ECONOMIST 29
Why the PPF Might Be Bow-Shaped
So, PPF is bow-shaped when different workers
have different skills, different opportunity costs
of producing one good in terms of the other.
The PPF would also be bow-shaped when
there is some other resource, or mix of
resources with varying opportunity costs.
• E.g., different types of land suited for
different uses
35
ACTIVE LEARNING 3:
Answers
c. A tax cut is needed to stimulate the economy.
Normative, another value judgment.
d. An increase in the price of gasoline will cause an
increase in consumer demand for video rentals.
Positive, describes a relationship.
Note that a statement need not be true to be
positive.
36
Why Economists Disagree
Economists often give conflicting policy advice.
They sometimes disagree about the validity of
alternative positive theories about the world.
They may have different values and, therefore,
different normative views about what policy
should try to accomplish.
Yet, there are many propositions about which
most economists agree.