1. Thinking Like an Economist Chapter 2 Copyright © 2001 by Harcourt, Inc . All rights reserved. Requests for permission to make copies of any part of the work should be mailed to: Permissions Department, Harcourt College Publishers, 6277 Sea Harbor Drive, Orlando, Florida 32887-6777.

2. Every field of study has its own terminology Mathematics Psychology Law axioms integrals vector spaces ego id cognitive dissonance torts venues Promissory estoppel

3. Every field of study has its own terminology Economics Supply Demand Elasticity Consumer Surplus Comparative advantage Opportunity cost Deadweight loss

10. The Circular-Flow Model The circular-flow model is a simple way to visually show the economic transactions that occur between households and firms in the economy.

11. The Circular-Flow Diagram Firms Households Market for Factors of Production Market for Goods and Services Spending Revenue Wages, rent, and profit Income Goods & Services sold Goods & Services bought Labor, land, and capital Inputs for production

15. The Production Possibilities Frontier The production possibilities frontier is a graph showing the various combinations of output that the economy can possibly produce given the available factors of production and technology.

16. The Production Possibilities Frontier Quantity of Computers Produced Quantity of Cars Produced 3,000 1,000 0 2,000 700 1,000 300 A B 2,200 600 C D

17. The Production Possibilities Frontier Quantity of Computers Produced Quantity of Cars Produced 3,000 1,000 2,000 2,200 A 700 600 300 0 1,000 B C D Production possibilities frontier

19. The Production Possibilities Frontier Quantity of Computers Produced Quantity of Cars Produced 3,000 2,000 A 700 0 1,000 An outward shift in the production possibilities frontier 4,000 E 2,100 750

28. Graphical Review

29. The Circular-Flow Diagram Firms Households Market for Factors of Production Market for Goods and Services Spending Revenue Wages, rent, and profit Income Labor, land, and capital Inputs for production Goods & Services sold Goods & Services bought

30. The Production Possibilities Frontier Quantity of Computers Produced Quantity of Cars Produced 3,000 0 1,000 2,000 700 1,000 300 A B 2,200 600 C D

31. The Production Possibilities Frontier Quantity of Computers Produced Quantity of Cars Produced 3,000 1,000 2,000 2,200 A 700 600 300 0 1,000 B C D Production possibilities frontier

32. The Production Possibilities Frontier 4,000 Quantity of Computers Produced Quantity of Cars Produced 3,000 2,000 A 700 0 1,000 E 2,100 750 An outward shift in the production possibilities frontier