The Economist as Scientist. Economists play two roles: Scientists: try to explain the world Policy advisors: try to improve it In the first role, economists employ the scientific method : the dispassionate development and testing of theories about how the world works.
Very unrealistic, but simplifies the problem and yields useful insights about the more complicated real world.
Figure 3.1 shows the
PPF for bottled water and CDs.
Each point on the graph represents a column of the table.
The line through the points is the PPF.
We can produce at any point inside the PPF or on the frontier.
Points outside the PPF such as point G are unattainable.
The PPF separates attainable combinations from unattainable combinations.
Moving from A to B, 1 bottle of water costs 1 CD.
Moving from B to C, 1 bottle of water costs 2 CDs.
Moving from C to D, 1 bottle of water costs 3 CDs.
Moving from D to E, 1 bottle of water costs 4 CDs.
Moving from E to F, 1 bottle of water costs 5 CDs.
Mountain BikesWhy the PPF Might Be Bow-Shaped
As the economy shifts resources from milk to mountain bikes:
At A, opp. cost of mtn bikes is low.
At point A, most workers are producing milk, even those that are better suited to buildingmountain bikes.
So, you do not have to give up much milk to get more bikes.
At B, opp. cost of mtn bikes is high.
At B, most workers are producing bikes. The few left in milk are the best milkers.
Producing more bikes would require shifting some of the best milkers away from milk production, which would cause a big drop in milk output.
The slope of a line equals the “rise over the run” – the amount the line rises when you move to the right by one unit.
Here, the opportunity cost of a computer is 10 tons of wheat.