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The Circular Flow Diagram: A simple model of who participates on what markets. Examples of Inputs or Factors of Production are labor, land, capital, energy, ...
Typology: Lecture notes
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Two Examples of Economic Models
The Circular Flow Diagram: A simple model of who participates on what markets.
Examples of Inputs or Factors of Production are labor, land, capital, energy, and materials.
The model assumes that firms do not buy goods or services, there is no government, no asset markets, ...
The inner loop is the flow of goods and services.
The outer loop is the flow of dollars.
The Production Possibilities Frontier
A model that shows the combination of outputs (here, computers and cars) that the economy is capable of producing.
Point C is not feasible. Point D is feasible but not efficient. A, B, E, and F efficient. There is a tradeoff.
By comparing A and B, we see that the opportunity cost of 100 cars is 200 computers, or 2 computers per car. Similarly, the opportunity cost of a computer is .5 cars.
The opportunity cost of a car is the slope of the PPF. slope of PPF = ªComp/ªCar = 2.
Opportunity cost depends on where you are: the PPF is bowed outward.
Technological advance will shift the PPF, and could lead to more production of each good.
Why Economists Disagree :
Peter: income is $50,000, tax is $5,000 (10%) Paul: income is $10,000, tax is $2,000 (20%)
Two economists with different values will disagree over how to raise the $7,000.
Graphing Data
The demand curve to illustrate coordinate systems.
The data on the novels purchased by Emma can be presented in tabular form or graphed using a coordinate system.
The quantity demanded (x-coordinate) and price (y-coordinate) are negatively related.
Graphs tell us about “correlations”, not cause and effect.
An omitted variable can be causing both variables on the graph to move. See the example of cancer risk and lighters.
We can be wrong about which variable is causing which: reverse causality. Does a police presence cause violent crimes, or do violent crimes compel a police presence?
Even timing is sometimes misleading: buying a crib is often followed by birth of a child.
