Ch 2CircularFlowModelJan30 2024TheCircular FlowDiagramProductMarket Wheregoodsandservicesareexchanged ConsistofexchangefromFirmtohouseholds FactorMarket Wherefactorsofproductionaremade fromhouseholdstoFirm Threethings 1 Land2 Labor3 Capital1stmodelCircularFirmDiagram avisualrepresentationmodelofeconomy showshowdollarsflowthroughmarketsamonghouseholdsandfirms Twotypesofactors1 Households2 FirmsTwomarkets1 Themarketofgoodsandservices2 Thefactorsofproduction FactorsofProductionThefactorsofproductionaretheresourcesthattheeconomyusedtoproducegoodsandservices IncludingLabor LandandCapital buildingsandmachinesusedinproduction Figure1 Note Ch 2CircularFlowModelJan30 20241 Thegovernmentisnotpartofthesimplecircularflowmarket 2 2ndModelTheProductionPossibilitiesFrontierPPFPPF agraphthatshowsthecombinations output oftwogoodstheeconomycanpossiblyproducegiventheavailableresourcesandtheavailabletechnology PPFExampleEmploymentOflaborhoursProductionComputerWheatComputersWheatA50k05000B40k10k4001kC25k25k2502 5kD10k40k1004kE050k05kExample Twogoods computersandwheat Oneresourcelabor measuredinhours Ch 2CircularFlowModelJan30 2024 Economyhas50 000laborhourspermonthavailableforproduction AnyPointInsidethePPFareinefficient AnypointwithinthePPFisefficientAnypointoutsidethePPFisunattainable ThePPFandOpportunityCost1 Keyword OpportunityCostislikeOpportunitylost a Keynote PPFlinealwaysgoesfromrighttoleftandnegative asweusedabsolutevaluefortheOC b TheslopeofthePPFtellsyouimportantinformation 2 TheO CofproducingComputersisXamountofWheat 3 MovingalongaPPFinvolvesshiftingresources e glabor fromtheproductionofonefoodtotheother 4 TheOpportunityCostofanitemiswhatmustbegivenuptoobtainthatitem Ch 2CircularFlowModelJan30 20245 Societyfacesatradeoff Gettingmoreofonegoodrequiressacrificesofsomeoftheother 6 TheslopeofthePPFtellsyoutheO Cofonegoodoritem 7 SlopereferstoOpportunityCost 8 WhymightthePPFbeBow Shaped OpportunityCost ThebowshapeofthePPFillustratestheconceptofincreasingopportunitycost Asaneconomyproducesmoreofonegood itmustsacrificeincreasingquantitiesofanother Thereforethereissuchathingasspecialization 9 IfthereisahighlycapitalspecializationthenitwouldbeaBow Shape duetoincreasingopportunityCost HomeworkBothintheProblemSetChapter4Chapter5Specializationfromgainsandtrades1 CountriesthathavelowerOChaveacomparativeadvantageinX Ex FrancehasanadvantageincreatingWine thereforetheywilltradetoEngland asEnglandhasahigheropportunitycostinWine
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