Circular Flow
Model
Households
Land,
Goods
and
services
bought
labor, and
Capital
Income
Spending
Markets
for goods
+
Markets for
the factors
of production!
Wages, rent,
Purchased at pro t
land, labor,
and capital
Firms
services
Revenue
Goods
and services
to be soll
Key:
→ ow of dollars
ow of goods
and services
fl fl fi
,Chapter ?
Economics & Life
Economics : The study of now people manage
resources
Microeconomics: the study of now individuals
and rms manage resources
Macroeconomics: the study of the economy as
a whole, and how policy-makes manage
growth and behavior of the overall economy
Rational behavior when people make
Choices to achieve their goals in the most
effective way possible given their resources
Four questions asked by economists:
- what are the wants and constraints of those
inuolued ?
what are the trade offs?
How will others respond?
resources being allocated in the best
way possible?
-Are
Scarcity: the condition of wanting
more
than we can get with available resources
Opportunity cost when you gain some you
lose some
Helps us understand trade offs
Marginal decision making: Describes the idea that
rational people compare addtional bene ts with
aditional costs
fi fi
,sunk cost : a cost that has already been
incurred and cannot be recovered
the
An incentive is something that causes people
to benave a certain way by changing
trade offs they face
(+) positive incentive Cincentive) makes
people more likely to do something
(-)
negative incentive (disincentive) makes
people less likely
some
,Chapter 2:
Specialization + Exchange
Production possibilities frontier (PPF) ; a line or
the possible combinations
of outputs that can be
produceol using all
corve that shows ali
available resources
Capital
SAQLA
-A-attainable & ef cient
- Baattainable but
inef cient
-c = unattainable
B
c
of a
Consumption
Casodes
-Two main factors that shift PPF are
number of workers t shanges in technology
Absolute advantage: the ability to produce more
good or service than others can with
a given amount of resources
Comparitive advantage : the ability to
prodeuge a good on service at a lower
opportunity cost than others
Specialization. spending all of your time
producing a speci c good
sains from trade the improvement in outcomes
that occurs when specialized prool ucens
exchange goods and services
fi fifi
Model
Households
Land,
Goods
and
services
bought
labor, and
Capital
Income
Spending
Markets
for goods
+
Markets for
the factors
of production!
Wages, rent,
Purchased at pro t
land, labor,
and capital
Firms
services
Revenue
Goods
and services
to be soll
Key:
→ ow of dollars
ow of goods
and services
fl fl fi
,Chapter ?
Economics & Life
Economics : The study of now people manage
resources
Microeconomics: the study of now individuals
and rms manage resources
Macroeconomics: the study of the economy as
a whole, and how policy-makes manage
growth and behavior of the overall economy
Rational behavior when people make
Choices to achieve their goals in the most
effective way possible given their resources
Four questions asked by economists:
- what are the wants and constraints of those
inuolued ?
what are the trade offs?
How will others respond?
resources being allocated in the best
way possible?
-Are
Scarcity: the condition of wanting
more
than we can get with available resources
Opportunity cost when you gain some you
lose some
Helps us understand trade offs
Marginal decision making: Describes the idea that
rational people compare addtional bene ts with
aditional costs
fi fi
,sunk cost : a cost that has already been
incurred and cannot be recovered
the
An incentive is something that causes people
to benave a certain way by changing
trade offs they face
(+) positive incentive Cincentive) makes
people more likely to do something
(-)
negative incentive (disincentive) makes
people less likely
some
,Chapter 2:
Specialization + Exchange
Production possibilities frontier (PPF) ; a line or
the possible combinations
of outputs that can be
produceol using all
corve that shows ali
available resources
Capital
SAQLA
-A-attainable & ef cient
- Baattainable but
inef cient
-c = unattainable
B
c
of a
Consumption
Casodes
-Two main factors that shift PPF are
number of workers t shanges in technology
Absolute advantage: the ability to produce more
good or service than others can with
a given amount of resources
Comparitive advantage : the ability to
prodeuge a good on service at a lower
opportunity cost than others
Specialization. spending all of your time
producing a speci c good
sains from trade the improvement in outcomes
that occurs when specialized prool ucens
exchange goods and services
fi fifi
