Spending

Goods andservicesbought

Revenue

Goodsand servicessold

Labor, land,capital & entrepreneurship

Income

= Flow of inputs and outputs

= Flow of dollars

Factors ofproduction

Wages, rent,and profit

FIRMS

HOUSEHOLDS

FACTOR Market

PRODUCT MARKET

Circular Flow

Price of Oil

$85 => $150

Affect onCircular Flow?

GDP growth by quarter (3months)

Business Cycle

?

2000

1990

’s T

echn

olog

y B

oom

2001

2006

Hou

sing

Bub

ble

2008-09

2012

Great R

ecession

Production Possibilities Frontier

1st Economic Graph

Production Possibilities Frontier

• Concepts illustrated by PPF:– Efficiency, Trade-offs, Opportunity cost, Economic growth

• Assumptions: country uses all of its resources to produce only 2 goods

2nd Economic Model

Productions Possibility Frontier• Constant Cost PPF Graph (straight line PPF)

Qty

Food

Qty

Shelter

. B

. A

. C

(100, 0)

(0,100)

(50,50)

Any point above line is Unobtainable in Short Run with existing technology & resources

Any point on line is Efficient production of goods

Any point below line is Inefficient

Which Society is more EFFICIENT?

Country A

Country B

Assumptions: -produce only 2 goods -same resources for both countries

Straight Line PPF

• Slope = Opportunity Cost Qty

Food

Qty

Shelter

. B

10

10

----------

----

----

---5

5

Opportunity Cost point A → B: . A

C

Quantity Cars 0 800

1,000

1,000

QuantityHouses

B

“Bowed” PPF Curve

.A

Move from Point A BOpportunity Cost of gaining 400 Cars is 100 Houses Gain 1 Car Give up 1/4 House

Move from Point B COpportunity Cost of gaining 400 Cars is 200 HousesGain 1 Car Give up 1/2 House

700

--------------

----

----

----

----

----

----

----

---900

400

Increasing OpportunityCost!

Increasing vs. Constant Costs

Straight line PPF curves have Constant Opportunity Costs

Bowed PPF curves have Increasing Opportunity Costs

Qty of

Cars

2,200

600

2,300

6500

4,000

3,000

1,000

Qty ofComputers

A

G

Economic Goal: Shift PPF outward

Increased Efficiency (productivity) will shift PPF curve outward

You get more fromsame scarce resources!

PPF Summary• PPF Line represents all efficient production points

• Points below PPF are inefficient (not using resources fully)

• Points above PPF are not attainable in short run– Cannot attain it with existing technology & resources

• “Bowed” PPF curves have increasing opportunity cost

• Straight Line PPF curves have constant opportunity cost

• Long Run goal is to shift the line outward (become more efficient)