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

  1. Economic Growth