ECO 2030 1st Edition Lecture 4 Outline of Last Lecture I 10 Principles of Economics and Introduction to economic models Outline of Current Lecture II Assumptions and models III Elements of Circular Flow Diagram IV The Production Possibilities Frontier Model PPF Current Lecture I II Assumptions and models A Both serve to simplify a complex reality Models highly simplistic visual representation of complex economic scenarios A Think of a road map as an example Terms to Know I II Business cycle Simply refers to whether the economy is growing or shrinking fluctuation Factors of production Labor land and capital meaning building machines ect The Circular Flow Diagram I A simplistic model of how our economy works by depicting the flow of money between actors in the economy A Key Assumption Government plays no role B Includes Two types of actors households and firms and two markets the goods and services and the market factors of production C Explained Households exchange factors of production e g labor for a salary Firms get hire the factors of production which produces goods and services that households buy That is the circular flow These notes represent a detailed interpretation of the professor s lecture GradeBuddy is best used as a supplement to your own notes not as a substitute Green flows of income payments Red products and factors of production goods services and labor buildings machines Remember government involvement is excluded in this model for simplicity The Production Possibilities Frontier Model PPF I A model that depicts a choice the economy has to make with producing two goods with the given resources and technologies eg Two Goods Computers and Wheat One resource Labor hours The choice is how much would an economy devote to either product only produce computers and no wheat or vice versa or something inbetween The example above shows the choices we have from A to E If the economy chose to only produce wheat and no computers they would be at point B However if the economy chose to only produce computers and no what they would be at point A If they devoted half of their resources in this case labor hours to both producing computers and wheat they would be at point C Note achieving an outcome of 2000 tons of what and 200 computers approximately where the red dot is located is possible however it is not efficient because it is not maximizing available resources labor hours On the other hand producing 4000 tons of what and 350 computers approximately where the red dot is is not achievable due to resource constraints available labor hours The Production Possibilities Frontier Model PPF to be continued next lecture
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