Economic Model - Circular Flow Diagram

• First Model: Circular Flow Diagram

• Circular- flow diagram

  • Visual model of the economy

  • Shows how dollars flow through markets among households and firms

• Decision makers

  • Firms and Households

• Markets

  • For goods and services

  • For factors of production

No government

No foreign sector (closed economy)

No financial market

Goods and service

• Buyer → Households

• Seller → Firm

Factors and Production

• Buyer → Firm

• Seller → Households

Example

Family owned business

• Firm → sells goods and services

• Households → sell factors and productions

Second Model: Production Possiblites Frontiers (PPF)

• The PPF is a graph that shows the combinations of two goods the economy can possibly produce given the available resources and the available technology

• Example:

  • Two goods: Airplanes and Soybean

  • One resource: Fixed amount of labor (measured in hours)

  • Fixed amount and quality of technology

  • The available resource and technology can be used to produce

1. Labor

   • Specialized Labor

   • General Labor

   
   

2. Technology

   • Specific Technology

   • General Technology

3. Economic Growth