Mankiw's Principles of Microeconomics Chapter 2

1. How does the use of a very simplified model of the economy such as those found in a production possibilities frontier help you to understand the economy?

The model of production possibilities frontier helps me to understand the levels of efficiency an economy is producing at. While it’s not possible to produce beyond the arch of the production possibility frontier, points that fall inside the arch show that an economy is not producing at its full capacity. One of the reasons for limited production could be because of inadequate demand. The mathematical measurement of opportunity cost can also be obtained by using the slope formula m=rise/run. It’s also important to note that growth in technological advancements can push either axis outward.

2. Give an example of a positive or normative statement about the economy.  Why does it matter which it is?

Positive Statement: Re-distribution of household income limits economic growth

Normative Statement: It’s immoral for government to re-distribute income

Differentiating the two types of statements is important since economists play both the role of scientist and policy adviser. Policy makers may make more normative statements since their role is to consider the best solution, while positive statements should be able to be evaluated based on the evidence presented.