Positive vs. Normative Statements

Positive Statements – statements that describe the world as it is.

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“A rise in consumer incomes will lead to a rise in the demand for new cars.”
“A fall in the exchange rate will lead to an increase in exports overseas.”
“More competition in markets can lead to lower prices for consumers.”
“If the government raises the tax on beer, this will lead to a fall in profits of the
brewers.”
Normative Statements – opinions that describe how the world should be



“The government should increase the national minimum wage to $6 per hour in
order to reduce relative poverty.”
“The government is right to introduce a ban on smoking in public places.”
“The retirement age should be raised to 75 to combat the effects of our ageing
population.”
Chapter 2 – Thinking Like an Economist



Macroeconomics – study of the performance, structure, behavior and
decision-making of the economy as a whole
Microeconomics – study of the decisions of individuals; households and
firms and their interaction
Economics is a science
 Devise theories, collect and analyze data, make assumptions
 Economic Models – diagrams, graphs and equations used to represent
human behavior and economic theory
Factors of Production
- Factors of Production - resources required to
produce economic products, goods and services
1.
2.
3.
4.
Land
Labor
Capital
Entrepreneurship
Land
• Land – natural resources not created by human effort that are
used to produce goods and services
• The "gifts of nature".
• Examples: Forests, fish, oil, gas, cattle, etc…
Labor
• Labor – time and effort that a person devotes to producing goods
and services.
• Labor resources are those provided by the body and minds of
men and women.
• Examples: doctors, teachers, construction workers, etc...
Capital

Capital – resource that is used to produce additional goods and services
 Capital is the machinery or tools that workers use to transform natural resources into
finished products.
 Examples: machines, computers, tablets, etc…
3 Types of Capital



Physical Capital – also known as Capital Goods, human made objects used to create other
goods and services
 Examples: Machines, phones, computers, equipment
Human Capital –skills, abilities, and specialized talents of people
 Examples: College, training, technical school, etc.
Financial Capital – money, used by entrepreneurs and businesses to buy what they need to
produce their goods or services
 Examples: money
Entrepreneurs
• Entrepreneurs – ambitious business people who organize the factors
of production to create new goods and services
• Entrepreneurs are the "risk takers" who produce a good or service
that they believe will succeed in the marketplace.
Goods
 Good – physical, tangible(touchable) product
i.e. – Automobiles, Video Games, Cell Phones, CD’s,
Tickle Me Elmo, etc…
Services
 Service – a non-tangible action or activity that is performed
for someone else
 i.e – Financial Advisor, Stock Broker, Movies, Dentist,
Teachers, etc..


Need – a basic requirement for survival
 e.g. – food, clothing, education, etc…
Want – not a basic requirement for survival; a means
of expressing a need
 e.g. – cheeseburger, Abercrombie and Fitch,
University of Georgia, etc…
OR
Goods and Services Chart
Item
Good/Service Want/Need
advertised
Market
Classify the Factors of Production in the following scenario:
•You decide to order a pizza to satisfy your wants. First, you picked up the telephone and gave
your order to the owner that entered it into her computer. The information came up on the
chief baker’s monitor in the kitchen and he assigned it to one of his cooks. The cook cook used
his knowledge of mixing dough out of salt, flour, eggs, and milk. The cook finished mixing
dough, washed his hands in the sink, and prepared your pizza using tomato sauce, cheese, and
sausage. He then placed the pizza in the oven. Within 10 minutes the pizza was cooked and
placed in a cardboard box. The delivery person then grabbed your pizza, jumped in the company
car, and delivered it to your door.
Classify the Factors of Production in the following scenario:
Entrepreneur
1. Owner _________________________________
Physical Capital
2. Computer _________________________________
Physical Capital
3. Chief baker’s monitor _________________________________
Physical Capital
4. Kitchen _________________________________
Labor
5. Cooks _________________________________
6. Knowledge of mixing dough _________________________________
Human Capital
Land
7. Salt, flour, eggs, and milk _________________________________
Physical Capital
8. Sink _________________________________
Land
9. Tomato sauce, cheese, and sausage _________________________________
Physical Capital
10. Oven _________________________________
Physical Capital
11. Cardboard box _________________________________
Labor
12. Delivery person _________________________________
Physical Capital
13. Company car _________________________________
Households and Firms


Household – Person or group of people living in a residence;
consumers of goods/services
Firm – business organization that uses resources (inputs) to
produce a product, which it then sells
Product Markets

Product Markets – Houses and firms interact; producers sell
their goods and services to consumers
 Ebay, Amazon, the mall, McDonalds, Babies R Us, etc.
 Households are buyers of goods and services
 Firms are sellers of goods and services
Factor Markets

Factor Markets – the markets where productive resources (F.O.P)
are bought and sold
 Labor - Firms (businesses) hire workers and pay them salaries
 Land - Purchase/rent land
 Capital - Use money from households (spending,investment,
etc) to purchase capital goods
Circular-Flow Diagram

Circular-flow diagram – visual model of a free market economy simplified
into households and firms communicating in the factor and product
markets

Shows how dollars and stuff flows in an economy from households to firms
and vice versa.
Circular Flow Model - shows the flow of money and inputs/outputs from and to firms and
households in a market economy
Consumer Spending
Business Revenue
Product
Market
Consumer Goods and Services Purchased
Households
Firms
Land, Labor, Capital, Entrepreneurs
Income, Wages, Salaries
Goods and Services (outputs
sold
Inputs for production
Factor
Market
Payments for the F.O.P
Daily Assignment - Circular Flow Model of Economic Activity
Consumer Spending
Business Income
1. _________________________
1. _________________________
Product
Market
Goods Purchased
Goods Offered
1. ___________________________
1. ______________________________
2. ___________________________
2. _______________________________
Firm
Household
1. ________________________
Firm 1. _____________________________
Firm 2. _____________________________
Inputs for Production
Factor of Production Offered
1. ___________________________
1. ___________________________
Weekly Income
1. __________________
Factor
Market
Payments for F.O.P
1. _________________
Circular Flow Model of Economic Activity
Consumer Spending
Business Income
9.49
1. _________________________
1. _________________________
9.49
Product
Market
Goods Purchased
Goods Offered
Tacos
Burritos
2. ___________________________
Fajitas
Fajitas
1. ___________________________
1. ______________________________
3.___________________________
Household
Elisa
1. ________________________
Marcella
2. ________________________
Firm
Cilantros
Firm 1. _____________________________
Books a Million
Firm 2. _____________________________
Input for Production
Factor of Production Offered
1.
Labor/Salesperson
1. ___________________________
2.
3.
Weekly Income
200
1. __________________
Factor
Market
Stockers
_________________________
Coffee Sellers
_________________________
Cashiers
________________________
Payments for F.O.P
3000- Lease
1. ________________
2200 – Electric
2. ________________
3. ________________
400 - Water
Circular Flow Model of a Mixed Economy
Consumer Spending/Investing
Business Income/Revenue
Product
Market
Goods and Services
Sold
Goods and
Services
Purchased:
Households
Expenditures
Expenditures
Land, Labor,
Capital,
Entrepreneur
Income to Households/Individuals
Firms
Inputs for
Production
(F.O.P.)
Factor
Market
Payment for F.O.P. –
Wages, rent,
capital goods
 PPF Model – shows/illustrates the possible combinations of output that can
be produced given the productive resources available
Used to visually represent tradeoffs and opportunity cost
Good A
A
B
C
Good B
Production Possibilities Frontier Activity
Round
Links
Smiles
1
2
3
4
5
•
•
•
1.
2.
3.
Materials for each student:
– 8 sheets of 8 1/2 x 11 paper 1 roll tape 1 pair
scissors 1 pencil or pen
Conducting the experiment:
– For each round, students begin with 16 strips,
16 rectangles, a pen, a roll of tape, and a pair
of scissors.
You will have 4 minutes of production time for each
round.
Round 1: Make only links (maximum 32).
Round 2: Make only smiles (maximum 32).
Round 3: Make half links and half smiles (16/16)




Quick quizzes, Questions for Review and
Problems and Application’s due Tuesday
night, 1-17 by 9 pm (answers will be posted
after 9).
Chapter 2 Test Wednesday, 1-18.
Homework and Youtube videos due on
Wednesday, 1-18 included in manilla folder.
Prequiz – Due Thursday, 1-19 at 11:45am
1.
2.
3.
4.
5.
6.
7.
What resources were scarce?
What was the opportunity cost of producing all
smiles?
What was the opportunity cost of producing all
links?
How did you increase efficiency?
When did you experience
underutilization/inefficiency?
What allowed for growth?
How does this relate to the real world?
 Individual PPF – Individual tradeoffs
 Constant opportunity cost - Linear shape of the curve represents a
perfect/proportional tradeoff between two goods
Work
A
1 Hour
B
30 Min
C
0
30 Min
1 Hour
Play
 Society’s PPF – social tradeoffs
 Shape of the curve is generally bowed outwards
 Law of increasing opportunity cost - as production increases, the cost to produce an
additional unit of that product increases as well.
Some resources are specialized to only efficiently produce one product so using those
specialized resources on a different product is inefficient
30
29
25
10
What is the PPC Model?
PPC Model – shows/illustrates the possible
combinations of goods and services that
can be produced by a single nation, firm or
individual given the productive resources
available
What does it show?
That nothing is free and that everything
has an opportunity cost
 If society wants more of one thing then it
must give up something in return
Used to visually represent opportunity
cost
•What basic economic
concepts can it be used
to model?
•Scarcity
•Tradeoffs
•Opportunity cost
•Economic growth
•Efficiency
•Unemployment
Quantity of
Computers
Produced
F
3,000
Production
Possibilities
Frontier
A
2,200
2,000
B
1,000
E
0
300
600 700
1,000
Quantity of
Cars Produced
 Efficiency – using resources in such a way as to maximize the production of goods and
services *
Points along the curve, (a – c) *
Efficiency

Underutilization – using fewer resources than an economy/business is
capable of; inefficient use of resources

Points inside the curve, d (inefficient use of resources)
Underutilization
/Inefficiency

Growth (future technology) – the change in ability to produce, reflects a
change in the curve; Currently unattainable level of production
 New frontier, point e, (usually as a result of new technology)
Growth
Unattainable/Economic Growth
C
F
A
Underutilization
/Inefficiency
B
Frontier
/Efficiency
D
E
1,000
Increase in available resources
Decrease in available resources
39
PPC Activity
12
Good B
10
8
6
4
2
0
1
2
3
4
5
Good A
0
1
2
3
4
5
Good B
12
10
8
6
4
2
6
0
6
Good A
Answer the following questions based on the model above:
1. The opportunity cost of increasing production from Good A from zero units to
one unit is the loss of __________ unit (s) of Good B.
2. The opportunity cost of increasing production from Good A from one unit to
two units is the loss of __________ unit (s) of Good B. The total loss is ____
3. The opportunity cost of increasing production from Good A from zero units to
6 units is the loss of _________ unit (s) of Good B.
Review - Guns or Butter PPF
1. How many guns can be produced when no butter is produced? ________
2. How much butter can be produced when no guns are produced? _______
3. The opportunity cost of increasing the production of guns from 0 to 40 units
is ________ units of butter.
4. What would it say about this society if the production decision was to
produce at the (20, 45) point; assuming that it takes 30 units of butter to
provide basic foodstuffs to society and 40 units of Guns to protect their
This society cares more about military than providing consumer goods for the people
society? ___________________________________________________
PPF Exercise
A
200
B
180
160
140
C
120
100
25
55
60
60
D
80
60
40
20
E
5
1.
2.
3.
10 15 20 25 30 35 40 45 50 55 60
Along the curve (frontier)
Inside the curve
Outside the curve
PPF Exercise
1.
2.
3.
4.
5.
True
False
True
True
False
Shoes
40
A
35
B
30
25
20
C
15
D
10
5
E
10
20
30
40
50
60
70
CD Players
Due Today 8-30
Chapter 1 - 2
1. Chapter 1 Notes
2. Chapter 2 Notes
3. PPF Practice 1
4. PPF Practice 2
5. Circular Flow Practice Review
Junk!!!
Agenda
1. Short Answers
2. Prequiz – Chapter 3 Prequiz A
• Due Wednesday – Online Video Quiz
“Comparative and Absolute Advantage”
Include on your Test
1.Name
2.Date
3.Class Period
4.ID: A, B or C
5.Chapter 2 Test
Junk!!!
Extra Credit
1. Write a positive
statement about the
benefits of investing in
human capital.
2. Write a normative
statement about the
government’s role in the
economy.
3. Explain your
interpretation of the
political cartoon:
1. Illustrator’s
message
2. Clues (people,
symbols etc.)
3. Do you agree or
disagree?