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economic models (chapter 2)
economist’s jobs:
try to explain the world (scientist)
try to improve it (policy advisor)
models: a simplified representation of a more complicated reality
visual model
→circular-flow diagram: a visual model of the economy, that shows how
dollars flow through markets among households and firms
two types of actors: households; firms
two markets: goods and services; “factors of production”: the resources
the economy uses to produce goods and services including labor, land,
capital (buildings and machines used in production)
red arrow: how goods/services/factors flow (factors of production, labor,
land, and capital)
green arrow: how money flows between buyers and sellers (spending,
revenue, wages, rent, profit, and income)
firms: buy/hire factors of production, use them to produce goods and
services, steel goods and services (income wages, rent, and profit)
households: land, labor, capital
the production possibilities frontier (PPF): a graph that shows the
combinations of two goods the economy can possibly produce given the
available resources and the available technology.
two goods: ie computer and wheat
one resource: ie labor (measured in hours)
economic models (chapter 2) 1
economic models (chapter 2)
economist’s jobs:
try to explain the world (scientist)
try to improve it (policy advisor)
models: a simplified representation of a more complicated reality
visual model
→circular-flow diagram: a visual model of the economy, that shows how
dollars flow through markets among households and firms
two types of actors: households; firms
two markets: goods and services; “factors of production”: the resources
the economy uses to produce goods and services including labor, land,
capital (buildings and machines used in production)
red arrow: how goods/services/factors flow (factors of production, labor,
land, and capital)
green arrow: how money flows between buyers and sellers (spending,
revenue, wages, rent, profit, and income)
firms: buy/hire factors of production, use them to produce goods and
services, steel goods and services (income wages, rent, and profit)
households: land, labor, capital
the production possibilities frontier (PPF): a graph that shows the
combinations of two goods the economy can possibly produce given the
available resources and the available technology.
two goods: ie computer and wheat
one resource: ie labor (measured in hours)
economic models (chapter 2) 1
