model
simplified representation in the real world (assumptions are used)
production possibility curve model (PPC) =
production possibility frontier (PPF)
PPC
shows the maximum combinations of goods and services a country can produce in a specific period of time, using all of its resources and the available technology in the most efficient way
production possibilities
all points on the curve
potential output =
potential growth
potential output
a change in economy, caused an increase in the maximum amount of goods that can be produced
reasons for potential growth
- an increase in the quantity of factors of production
- an increase in the quality of factors of production
- an improvement of technology
constant opportunity cost
factors of production can produce any of the 2 goods indistinctly as they are equally well suited for both goods, so factor of production can be transferred proportionally
non-parallel shift in PPC
technology change favoring the production of good x increases the production of that good proportionately more
in order for economy to produce somewhere on the PPC curve:
- all resources must be fully employed
- all resources must be used efficiently
economic growth
increases in the quantity of output produced in an economy over a period of time
the circular flow of income model
a model that illustrates the interactions between economic agents in an economy; helps us understand how an economy works, shows that in any given time period, the value of output is equal to total income garanted in producing that output = expenditures made to purchase that output
assumptions about a closed economy with two sectors
- households own all the factors of production
- firms produce all goods and services
- there is no government
- there are no other countries to trade with (closed economy)
- there are no banks or commercial institutions
draw a closed economy with 2 sectors model
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circular flow of income states
everything that goes around, comes around
how do firms pay household for production
land - rent
labour - wages
capital - interest
entrepreneurship - dividents
consumer expenditure =
household expenditure
consumer expenditure
the total amount of money spent on goods and services
costs of production
payments that firms make to buy factors of production
revenues
the payments that firms receive by selling goods and services
national income =
national output = national expenditure
what are the sectors of open economy
households, firms, government, financial institution, foreign countries
assumptions of an open economy with 5 sectors
- households own the factors of production
- firms produce goods and services
- government collects taxes to provide public and merit goods to society
- there are foreign countries, that both produce goods and services that they export to other countries, and consume goods and services that they import
- there are financial institutions where households can save their income and from which firms can take out loans to make investments and grow their businesses
draw an open economy with 5 factors model
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