ECON 110Lecture 3Outline of Lecture 2I. The Language of Economicsa. Scarcityb. Choicec. TradeoffsII. The Economic Approacha. The Scientific Methodb. The StepsIII. Economic Modelsa. How to build themb. ExamplesOutline of Current Lecture I. Circular Flow Diagrama. Details relationship between households and firmsb. Elements of the modeli. Actors1. Firmsa. Entities that utilize factors of production and turn out goods and servicesb. Buy resourcesc. Hire labord. Convert resources 2. Households a. Buy and consume goods and servicesb. Own and sell factors of production3. Marketsii. Factors of production are resources that the production process uses1. Land2. Labor3. Capital: not human input (equipment, supplies, etc.)c. This diagram excludes trade with economies of other nationsII. Production Possibilities Frontiera. Helps to show the most efficient production choicesb. Visible representation of all possible trade offsc. Frontier line can change with changes in available resourcesd. Example: capital goods vs. consumer goodsThese 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.III. Positive/Normative Statementsa. Positive statements attempt to describe the world objectively (descriptive analysis)b. Normative statements state how the world ought to be (prescriptive analysis)c. Studying economic phenomena vs. giving adviceCurrent Lecture - Economic Models and Economic Decision MakingThe first model that we looked at is called a circular flow diagram, which details the economic relationship between households and firms. As you study the model, you will notice several elements to it. The different actors in this model are the firms, the households, and the markets. The firms are entities that utilize factors of production in order to turn out goods and services; they buy resources, hire labor, and convert resources into products for the households.The households consume the goods and services, and own and sell the factors of production such as labor and land. The markets are the means of exchange between the firms and the households.Factors of production in this model are resources that the production process uses, such as land, labor, and capital. Land and labor are self-explanatory; land is constant, and labor dependson population. Capital is any resource that is not human input, such as equipment and supplies, and is technically non-financial. NOTE: This diagram excludes trade with economies of other nations.The other type of model we examined was the Production Possibilities Frontier (PPF), which is a graph that shows the combinations of outputs that are possible, given available factors of production and production technology. PPFs help to show the most efficient production choices by providing a visible representation of all possible tradeoffs. The line onthe graph runs between the two maximum production possibilities on the axes, and is calledthe frontier line. The frontier line can change with changes in production factors.The last bits discussed were positive and normative statements. While positive statements attempt to describe the world objectively (descriptive analysis), normative statements state how the world ought to be (prescriptive analysis.) Another way of looking at it is viewing it as the difference between studying economic phenomena and giving advice. It is important to understand the difference between the two. This diagram is a comparison of production of capital goods vs. production of consumer goods. With the first frontier line (on bottom), if the amount of capital goods at F are produced, no consumer goods can be produced. If E amount of consumer goods are produced, no capital goods can be produced. The difference between the two separate lines must be an increase in resources of some