ECON 101: INTRODUCTION TO

ECONOMICS I

Lecture 2 – Thinking Like an

Economist

Dr. Emmanuel Adu-Danso (Group A)

Department of Economics
School of Social Studies
2022/2023
 Lecture Overview
• This session will introduce you to what it means to be
and think like an economist - the economist’s approach
to problem solving.

• We will look at the economist as a scientist, where the

use of models helps to simplify complex relations in
order to draw conclusions.

• We will also look at the economist as a policy maker,

where we will make the point that economists do not
always agree because they may view things from
different perspectives.
Dr. Emmanuel Adu-Danso, Economics Department Slide 2
 Lecture Overview
• The objective of this session is to teach you how an
economist thinks.

• At the end of this lecture, you should be able to

– Explain basic models in economics
– Analyse statements from economics and identify the
perspective from which they argue

• Main text: Mankiw, G. (2012). Principles of

Economics (6th Edition), South Western.
– Chapter Two
Dr. Emmanuel Adu-Danso, Economics Department Slide 3
 The Economist as Scientist
• Economists play two roles:
1. Scientists - try to explain happenings in the world
2. Policy advisors - try to improve economic outcomes

• In the first, economists employ the

scientific method - the dispassionate development
and testing of theories about how the world works.

Dr. Emmanuel Adu-Danso, Economics Department Slide 4

 Assumptions & Models
• Assumptions simplify the complex world,
make it easier to understand.
– Example: To study international trade, assume two
countries and two goods. Seems unrealistic, but simple to
learn and gives useful insights about the real world.

• Model: a highly simplified representation of

a more complicated reality. Economists use models
to study economic issues.

Dr. Emmanuel Adu-Danso, Economics Department Slide 5

 Our First Model: The Circular-Flow Diagram

• The Circular-Flow Diagram: a visual model of the

economy, shows how money flows through markets
between households and firms
• Two types of “actors”:
– households
– firms
• Two markets:
– the market for goods and services
– the market for “factors of production”

Dr. Emmanuel Adu-Danso, Economics Department Slide 6

 The Circular-Flow Diagram
• Factors of production: the resources the economy
uses to produce goods & services, including
– labor
– land
– capital (buildings & machines used in production)

Dr. Emmanuel Adu-Danso, Economics Department Slide 7

 The Circular-Flow Diagram
Households:
▪ Own the factors of production,
sell/rent them to firms for income
▪ Buy and consume goods & services
Firms
Households
Firms:
▪ Buy/hire factors of production,
use them to produce goods
and services
▪ Sell goods & services Slide 8
FIGURE 1: The Circular-Flow Diagram

Revenue Spending
Markets for
G&S Goods &
G&S
sold Services bought

Flow of services and goods

Firms Households
Flow of income/ payments

Factors of Labor, land,

production Markets for capital
Factors of
Wages, rent, Production Income
Slide 9
profit
 Our Second Model: The Production Possibilities
Frontier
• The Production Possibilities Frontier (PPF):
a graph that shows the combinations of
two goods the economy can possibly produce given
the available resources and the available technology
• Example:
– Two goods: computers and wheat
– One resource: labor (measured in hours)
– Economy has 50,000 labor hours per month available for
production.

Dr. Emmanuel Adu-Danso, Economics Department Slide 10

 PPF Example
• Producing one computer requires 100 hours labor.
• Producing one ton of wheat requires 10 hours labor.
Employment of
Production
labor hours
Computers Wheat Computers Wheat
A 50,000 0 500 0
B 40,000 10,000 400 1,000
C 25,000 25,000 250 2,500
D 10,000 40,000 100 4,000
E 0 50,000 0 5,000
Dr. Emmanuel Adu-Danso, Economics Department Slide 11
 PPF Example

Wheat
Point Production
(tons)
on Com- 6,000
graph puters Wheat E
5,000
A 500 0 D
4,000
B 400 1,000 3,000 C
C 250 2,500 2,000
D 100 4,000 1,000 B

E 0 5,000 0 A
0 100 200 300 400 500 600
Computers
Dr. Emmanuel Adu-Danso, Economics Department Slide 12 12
 Points off the PPF
A. On the graph, find the point that represents
(100 computers, 3000 tons of wheat), label it F.
Would it be possible for the economy to produce this
combination of the two goods?
Why or why not?
B. Next, find the point that represents
(300 computers, 3500 tons of wheat), label it G.
Would it be possible for the economy to produce this
combination of the two goods?

Dr. Emmanuel Adu-Danso, Economics Department Slide 13

 Answers

▪ Point F: Wheat
100 computers, (tons)
3000 tons wheat 6,000

▪ Point F requires 5,000

40,000 hours 4,000

of labor. 3,000
F
Possible but 2,000
not efficient: 1,000
could get more
0
of either good
0 100 200 300 400 500 600
w/o sacrificing
Computers
any of the other.
Dr. Emmanuel Adu-Danso, Economics Department Slide 14
 Answers

▪ Point G: Wheat
300 computers, (tons)
3500 tons wheat 6,000
5,000
▪ Point G requires
4,000
65,000 hours G
of labor. 3,000
Not possible 2,000
because 1,000
economy 0
only has 0 100 200 300 400 500 600
50,000 hours. Computers
Dr. Emmanuel Adu-Danso, Economics Department Slide 15
 The PPF: What We Know So 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

Dr. Emmanuel Adu-Danso, Economics Department Slide 16

 The PPF and Opportunity Cost
• Recall: The opportunity cost of an item
is what must be given up to obtain that item.
• Moving along a PPF involves shifting resources (e.g.,
labor) from the production of one good to the other.
• Society faces a tradeoff: Getting more of one good
requires sacrificing some of the other.
• The slope of the PPF tells you the opportunity cost of
one good in terms of the other.

Dr. Emmanuel Adu-Danso, Economics Department Slide 17

 The PPF and Opportunity Cost
Wheat
The slope of a line
(tons) equals the
–1000 “rise over the run,”
6,000 slope = = –10
100 the amount the line
5,000
rises when you move
4,000
to the right by one
3,000 unit.
2,000
Here, the
1,000
opportunity cost of
0 a computer is
0 100 200 300 400 500 600 10 tons of wheat.
Computers
Slide 18
PPF and Opportunity Cost

In which country is the opportunity cost of cloth lower?

Nigeria Ghana
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
Answers

Ghana, because its PPF is not as steep as Nigeria’s.

Nigeria Ghana
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
Slide 20
 Economic Growth and the PPF
With additional
Wheat
resources or an (tons) Economic
improvement in 6,000 growth shifts
technology, the PPF
5,000
the economy can outward.
4,000
produce more
computers, 3,000
2,000
more wheat, 1,000
or any combination 0
in between. 0 100 200 300 400 500 600
Computers
Dr. Emmanuel Adu-Danso, Economics Department Slide 21
 The Shape of the PPF
• The PPF could be a straight line or bow-shaped
• Depends on what happens to opportunity cost
as economy shifts resources from one industry
to the other.
– If opp. cost remains constant, PPF is a straight line.
(In the previous example, opp. cost of a computer was
always 10 tons of wheat.)
– If opp. cost of a good rises as the economy produces more
of the good, PPF is bow-shaped.

Dr. Emmanuel Adu-Danso, Economics Department Slide 22

 Why the PPF Might Be Bow-Shaped

Carbonated
drinks
As the economy
shifts resources
from carbonated
drinks to mountain
bikes:
▪ PPF becomes
steeper
▪ opp. cost of
mountain bikes
Mountain Bikes
increases
Dr. Emmanuel Adu-Danso, Economics Department Slide 23
 Why the PPF Might Be Bow-Shaped

At point A, At A, opp. cost of

drinks
Carbonated
most workers are A mtn bikes is low.
producing carbonated
drinks,
even those who
are better suited
to building bikes.
So, do not have to
give up much drinks
to get more bikes.
Mountain Bikes

Dr. Emmanuel Adu-Danso, Economics Department Slide 24

 Why the PPF Might Be Bow-Shaped

At B, most workers are

drinks
Carbonated
producing bikes. At B, opp. cost
The few left in drinks of mtn bikes
are the best in drink is high.
formula.
Producing more bikes B
would require shifting
some of the best in
drink formula away
from drink production,
causing a big drop in
drink output. Mountain Bikes
Dr. Emmanuel Adu-Danso, Economics Department Slide 25
 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).

Dr. Emmanuel Adu-Danso, Economics Department Slide 26

 The PPF: A Summary
• The PPF shows all combinations of two goods that an
economy can possibly produce, given its resources
and technology.

• The PPF illustrates the concepts of tradeoff and

opportunity cost, efficiency and inefficiency,
unemployment, and economic growth.

• A bow-shaped PPF illustrates the concept of

increasing opportunity cost.

Dr. Emmanuel Adu-Danso, Economics Department Slide 27

 The Economist as Policy Advisor

• As scientists, economists make

positive statements, which attempt to describe the world
as it is.

• As policy advisors, economists make

normative statements, which attempt to prescribe how the
world should be.

• Positive statements can be confirmed or refuted;

normative statements cannot.
Dr. Emmanuel Adu-Danso, Economics Department Slide 28
 Identifying positive vs. normative

Which of these statements are “positive” and which are

“normative”? How can you tell the difference?
a. Prices rise when the government increases the quantity of
money.
b. The government should print less money.
c. A tax cut is needed to stimulate the economy.
d. An increase in the price of pizza will cause an increase in
consumer demand for internet data bundles.

Dr. Emmanuel Adu-Danso, Economics Department Slide 29

 Answers

a. Prices rise when the government increases the

quantity of money.
Positive – describes a relationship, could use
data to confirm or refute.

b. The government should print less money.

Normative – this is a value judgment, cannot be
confirmed or refuted.

Dr. Emmanuel Adu-Danso, Economics Department Slide 30

 Answers

c. A tax cut is needed to stimulate the economy.

Normative – another value judgment.

d. An increase in the price of pizza will cause an

increase in consumer demand for internet data
bundles.
Positive – describes a relationship.
Note that a statement need not be true to be
positive.
Dr. Emmanuel Adu-Danso, Economics Department Slide 31
 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.
Dr. Emmanuel Adu-Danso, Economics Department Slide 32
 Propositions about Which Most
Economists Agree (and % agreeing)
• A ceiling on rents reduces the quantity and quality of
housing available. (93%)
• Tariffs and import quotas usually reduce general
economic welfare. (93%)
• A large federal budget deficit has an adverse effect on
the economy. (83%)
• A minimum wage increases unemployment among young
and unskilled workers. (79%)
• Effluent taxes and marketable pollution permits
represent a better approach to pollution control than
imposition of pollution ceilings. (78%)
Dr. Emmanuel Adu-Danso, Economics Department Slide 33
 Summary
• As scientists, economists try to explain the world
using models with appropriate assumptions.

• Two simple models are the Circular-Flow Diagram

and the Production Possibilities Frontier.

• As policy advisers, economists offer advice on how to

improve the world.

Dr. Emmanuel Adu-Danso, Economics Department Slide 34