1AP EconomicsChapter 2 The Discipline of Economics- By Jacinda Jia2Topic List What is economics Micro vs. Macroeconomics Positive vs. normative economics Opportunity cost Production possibilities frontier Comparative advantage3Economics definedEconomics is a social science that studies how resources are used 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 economic 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 their 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 study 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 effect 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 profit 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 what 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 scientific 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 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 too 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.Land 2.Labor 3.Capital11Opportunity Cost Opportunity Cost The highest-valued alternative that must be given up in order to engage in an 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 Production Possibilities Frontier2 - 1BMWs Production Possibilities Frontier14Drawing a Production Possibilities Frontier for Rosies Boston Bakery2 - 1LEARNING OBJECTIVE1Hours Spent MakingQuantity MadeChoiceCakesPiesCake sPiesA5050B4142C3234D2326E1418F0501015Production Possibilities FrontierTwo factors cause 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 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 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 given quantity requires larger and larger decrease