Remember to check the calendar for assignments etc. posted at www.lincoln.edu.ar/stephens/ then go to the AP Econ site for the calendar.

Please address the following from the reading of Chapter Two in your Mankiw text:

1. Role of the Scientific Method in Economics:

• Observations lead to the development of theories
• Economists cannot experiment like scientists thus analyze and study changes in countries' economies
• Study of historical episodes allows economists to gain insight and knowledge about economic situations and develop theories from observation.

2. Role of Assumptions in Economics

• Assumptions made to help understand surroundings and focus thinking
• they simplify situations for clarity's sake and allow an easier analysis of the problem
• Assumptions lead to questions (i.e. If we assume this happens, how will that affect...)

3. Purpose of Economic Models

• To learn about the world...the models include important diagrams and equations but leave out more minor details concerning the economy.
• In other words, models simplify to help us understand-- so we can then work through real-life problems more easily.
• Common economic model: The circular flow diagram, which shows the shifting of money through markets among households and firms
  

4. The PPC:

• What does it show?A PPC is used to show the amounts of 2 goods that an economy could produce using limited resources. The PPC graph shows the posible outputs (products) an economy can produce given its available production factors and production technology. (a firm produces the products.)
• It is a vast simplification of economic proceedings within a market, designed to clarify the issues of scarcity, trade-offs, opportunity costs, and economic growth
• How is it used? The graph is used by plotting the amount of one output vs. another output. (vertically and horizantally). After plotting multiple points on the graph you can discuss what is the best option for your economy in how much of a certain output is produced at the possible cost of less production of another output. Any point that is on or inside the frontier of the PPC graph can be compared as a production possibility for the economy.
• What can shift the PPC? The PPC can be shifted outwards through technological advancements, or through an increase in the Factors of Production.
• How do you measure opportunity costs? Opportunity costs can be measured using the loss of Good B produced per extra unit of Good A produced or with the PPC graph you measure the opportunity cost by comparing what is being given up from one output to produce more of another output and vice versa. (ie. If you choose to produce 100 cars and 200 computers, your giving up the opportunnity to produce 200 cars and 100 computers. Depending on the demand of your markey will determine what is in your best interest to produce more of.)
• What are the trade-offs?

5. Give examples (meaning more than one) of what you would study for...

• Macroeconomics
  • Study of the entire economy. I.e. impact of foreign competition on US industries, new govt. agricultural policies, NAFTA, protectionism
  • Studying the effect of extensive borrowing on the economy (foreign debt, etc)
  • federal government dealing with inflation in a country
    
• Microeconomics
  • Study of the economy at a small scale, for example the study of the economy of a coffee shop in Martinez by analyzing it's costs, profits, prices, etc.
  • Can also be "personal" economics - i.e. studying your household's interaction in the market, exchange of labor/services for goods, etc.
  • Studying personal economic activity such as rent control in a city, different types of marketstructures on a smaller scale (ex. the kiosko monopoly at school)

6. Give examples of positive and normative economic statements

• positive
  • An example of what a positive economist would say: "Argentina has an inflation rate of 20%" (stating the facts)
  • "The unemployment rate is about 30%"
• normative
  • Economists state what should happen. I.e. To fix inflation, the central bank should use contractionary policy to reduce the money supply
• Economists can argue over positive statements using statistics and facts. It is harder to argue over normative statements because they include opinions about how the economy should be-- they are acting as policy advisor's giving advice, rather than scientists revealing a study.
  

7. Which would a president rather have? A positive economist or a normative economist and why?
A president would rather have a normative economist because they are the ones who would be able to advice him about policy making, whereas a positive economist would only state facts which unless the president is an economist himself would not do him much good.
While a positive economist would still be useful to a president by giving him a clear idea of the economic situation in the country, a normative economist would then be able to use these facts and develop a strategy to solve them. Therefore, both types are
extremely necessary to the president, the normative one eventually helping him act accordingly.

8. Why do economists disagree?

• Differences in scientific judgement - (hold different normative and positive views)

• Differences in values

• Disagree about the validity of alternative positive theories about how the world works
• Economics is still a relatively new science, and therefore new theories and ideas are constantly being developed, which will cause disagreement among different minded economists

9. Circular Flow of the Economy:

• What does it show?
  • The circular flow of the economy model, shows how income flows from one place to another. On one side it shows the production of the product, and how the businesses must obtain the factors of production to build the product. On the other side we see the commercial side, the selling of the product to the consumer.
  • The circular flow of the economy also has two loops in its model. The inner one shows us the flow of the goods or the services between the firms and the household. The household gives their land, labor and capital to the firms, which the firms use in order to return to the households goods and services.
  • The outer loop shows the flow of dollars in the economy. The households buy these goods and services from the firms and then the firm in exchange uses the money they receive to pay the factors of production received from the households (wages). The profit is also part of the household since it is given to the owners who are part of the household.
• Define product and factor markets
• The product market is the market for goods and services, in which firms sell their good sand services to the household, which puts money into the product market. So revenue goes to the firms, which in turn supplies the market with more goods and services, and goods and services are sold to the household in return for savings.
• The market for factors of production consists of the household selling these F of P, and the firms buying them. So land, labor and capital is supplied to the market by the households, while they recieve income from the market, firms recieve inputs for production while moeny in the form of wages and rent goes back to the market.
• Where should government be and why?
• The government should probably be in the middle, since it's main job is to collect taxes from all sides and provide services back to the community.