Date post: | 20-Aug-2015 |
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3 QUESTIONS AND TRADEOFFS
Circular Flow Model, Production Possibility Frontiers
The 3 questions
People seek to answer 3 questions when producing… What do we produce? How do we produce? For whom do we produce?
WHAT and How
Land Labor Capital Entrepreneurship
What: Goods and Services
How: Factors of Production
WHAT? Top Services and Goods
For Whom?
Land rent Labor wages Capital interest Entrepreneurship
profit/loss
FOPs are paid income.Functional distribution of income
Personal Distribution of Income
The Circular Flow Model
A model of the economy that shows: the circular flow of expenditures and
incomes that result from decision makers’ choices and
the way those choices interact in markets to determine what, how, and for whom goods and services are produced.
Households and Firms
Households Individuals or people living together as
decision-making units.
Firms Institutions that organize production of
goods and services.
Markets
Markets A market is any arrangement that brings
buyers and sellers together and enables them to get information and do business with each other.
Factor markets are markets in which factors of production are bought and sold.
Goods markets are markets in which goods and services are bought and sold.
Real Flows
In factor markets:• Households supply factors of
production
• Firms hire factors of production.
• Firms supply goods and services produced.
• Households buy goods and services.
In goods markets:
Money FLOWS
Firms pay households incomes for the services of factors of production.
Money Flows
• Households pay firms for the goods and services they buy.
What are the possible decisions a firm can make?
PRODUCTION POSSIBILITIES
Production Possibilities Frontier A curve showing the combinations between
two goods that can be produced using all available resources.
Figure 3.1 shows thePPF for bottled water and CDs.
Each point on the graph represents a column of the table.
The line through the points is the PPF.
PRODUCTION POSSIBILITIES
The PPF separates attainable combinations from unattainable combinations.
Points outside the PPF such as point G are unattainable.
We can produce at any point inside the PPF or on the frontier.
PRODUCTION POSSIBILITIES
1. When production is on the PPF, such as at point E or D, production is efficient.
2. If production were inside the PPF, such as at point H, more could be produced of both goods without forgoing either good. Production is inefficient.
PRODUCTION POSSIBILITIES
Moving from E to F, 1 bottle of water costs 5 CDs.
OPPORTUNITY COST
How do you shift the curve?
Improvements in productivity New technology Novel techniques
An increase in the factors of production An increase in the workforce Rise in the amount of capital
“Shift it to the right productivity or novelty,
Shift it to the left inefficiency”
Draw the following situation… Costa Rica can produce bananas and
coffee. During the last month, the country has made technological advances that led to a new, efficient method of planting crops. Draw and explain the impact of this advancement on both bananas and coffees.