First Basic Models of the Economy

FIRST BASIC MODELS OF THE ECONOMY

3.) Production Possibilities Curve

1.) Circular Flow Model2.) Business Cycle Model

Households

Firms

G & Smarkets

Demand stuff

Supply stuff

pay money

earn income

F & Pmarkets

Demand stuff

Supply stuff

earn income

pay money

Government

transferstaxes

taxessubsidies

Demand stuff

Demand stuff

1.) Circular Flow.- a basic way of understanding how different parts of the economic system fit together.

FIRST BASIC MODELS OF THE ECONOMY

1.) Circular Flow.- Consumers in the Economy- Households

FIRST BASIC MODELS OF THE ECONOMY

Households

1.) Circular Flow.- Households

- Producers in the economy.- Firms

FIRST BASIC MODELS OF THE ECONOMY

Households

Firms

1.) Circular Flow.- Households- Firms

- Where consumers go to buy things from producers.

- Good and services Market

FIRST BASIC MODELS OF THE ECONOMY

Households

Firms

G & Smarkets

Households

Firms

G & Smarkets

Demand stuff

Supply stuff

pay money

receive money

1.) Circular Flow.- Households- Firms- Good and services Market

- Where producers come to buy things from consumers.

- Factors of Production Market

FIRST BASIC MODELS OF THE ECONOMY

Households

Firms

G & Smarkets

F & Pmarkets

Households

Firms

G & Smarkets

F & Pmarkets

Demand stuff

Supply stuff

earn income

pay money

Households

Firms

G & Smarkets

Demand stuff

Supply stuff

pay money

earn income

F & Pmarkets

Demand stuff

Supply stuff

earn income

pay money

1.) Circular Flow.- Households- Firms- Good and services Market

- Factors of Production Market

- Collects taxes, buys public goods and gives out transfers.

- Government

FIRST BASIC MODELS OF THE ECONOMY

Households

Firms

G & Smarkets

F & Pmarkets

Government

Households

Firms

G & Smarkets

F & Pmarkets

Government

transferstaxes

taxessubsidies

Demand stuff

Demand stuff

Households

Firms

G & Smarkets

Demand stuff

Supply stuff

pay money

earn income

F & Pmarkets

Demand stuff

Supply stuff

earn income

pay money

Government

transferstaxes

taxessubsidies

Demand stuff

Demand stuff

FIRST BASIC MODELS OF THE ECONOMY

3.) Production Possibilities Curve

1.) Circular Flow Model2.) Business Cycle Model

2.) Business Cycle- Looking at how the economy grows over time.

FIRST BASIC MODELS OF THE ECONOMY

- Looking at things today. Now they are in the current time.

Short Run Growth

2.) Business Cycle

FIRST BASIC MODELS OF THE ECONOMY

……….

Time

Short Run

Econ Growth

- Looking at things today. Now they are in the current time.

2.) Business Cycle Model

2.) Business Cycle

- Looking at trend 趋向 over long periods of time.

- Long Run Growth trend

- Short Run Growth

- Averaging out the short run.

FIRST BASIC MODELS OF THE ECONOMY

…………………………

Time

Short Run

Econ Growth

Long Run

- Looking at trend 趋向 over long periods of time.

- Averaging out the short run.

2.) Business Cycle Model

or - high levels of consumer spending, business confidence, profits and investment.

Boom

2.) Business Cycle-Expansion

- Some times called recovery as well is coming out of a recession

- returning consumer spending and business confidence.

- Recovery

FIRST BASIC MODELS OF THE ECONOMY

Time

Short Run

Econ Growth

Boomor

- high levels of consumer spending, business confidence, profits and investment.

Expansion

- Some times called recovery as well is coming out of a recession

2.) Business Cycle Model

-Peak

or

- height of the business cycle.

Boom

2.) Business Cycle-Expansion

FIRST BASIC MODELS OF THE ECONOMY

Time

Short Run

Econ Growth

- height of the business cycle.

Peak

2.) Business Cycle Model

-Peak

or Boom

2.) Business Cycle-Expansion

- Recession Slump or - falling levels of consumer spending and confidence mean lower profits for businesses – which start to cut back on investment.

FIRST BASIC MODELS OF THE ECONOMY

Time

Short Run

Econ Growth

SlumporRecession

- falling levels of consumer spending and confidence mean lower profits for businesses – which start to cut back on investment.

2.) Business Cycle Model

-Peak

or Boom

2.) Business Cycle-Expansion

- Recession Slump or

- Bottom of the business cycle

-Trough

FIRST BASIC MODELS OF THE ECONOMY

Time

Short Run

Econ Growth

Trough

- bottom of the business cycle.

2.) Business Cycle Model

Time

Short Run

Econ Growth

Long Run

2.) Business Cycle ModelPeak

Recession Trough

Expansion

FIRST BASIC MODELS OF THE ECONOMY

3.) Production Possibilities Curve

1.) Circular Flow Model2.) Business Cycle Model

3.) Production Possibilities Curve (PPC)

Production Possibilities Frontier (PPF)

Also called:

- a graph that shows the combinations of two goods the economy can possibly produce given the available resources and the available technology.

FIRST BASIC MODELS OF THE ECONOMY

1.) Full employment: all resources are used

2.) Productive efficiency: goods are being produced in the least costly way

4.) Fixed 不变 amount of resources

5.) Fixed 不变 amount of technology

3.) Production Possibilities Curve

Assumptions 假定 :

0 100 200 300 400 500 6000

1,000

2,000

3,000

4,000

5,000

6,000

Axis Title

Axis Title

The PPC could be a straight line, or bow-shaped.

Depends on what happens to opportunity cost as economy shifts resources from one industry to the other.

3.) Production Possibilities Curve

枪炮

黄油

0 100 200 300 400 500 6000

1,000

2,000

3,000

4,000

5,000

6,000

Axis Title

Axis Title

Consumption goods

Capital goods

A

B

C

Any point that is OUTSIDE the PPC is Impossible!

Impossible!

3.) Production Possibilities Curve

0 100 200 300 400 500 6000

1,000

2,000

3,000

4,000

5,000

6,000

Axis Title

Axis Title

Consumption goods

Capital goods

A

B

C

D

Any point that is WITHIN the PPC is Inefficient. It means the resources are not completely being used.

InefficientAll

Area!

3.) Production Possibilities Curve

0 100 200 300 400 500 6000

1,000

2,000

3,000

4,000

5,000

6,000

Axis Title

Axis Title

Consumption goods

Capital goods

A

B

C

D

Any point that is ON the PPC is Efficient. It means the resources being completely used.

EfficientAll are

Points!

3.) Production Possibilities Curve

0 100 200 300 400 500 6000

1,000

2,000

3,000

4,000

5,000

6,000

Axis Title

Axis Title

Consumption goods

Capital goods

Economic Growth - Sustained expansion

of the production possibilities frontier

- to have economic growth means to increase the PPF so more can be produced without having to trade-off for as much.

3.) Production Possibilities Curve

0 100 200 300 400 500 6000

1,000

2,000

3,000

4,000

5,000

6,000

Axis Title

Axis Title

Consumption goods

Capital goods

A

Allocative Efficiency + Economic Growth

By producing more Capital goods today, that means you can have more Capital goods and Consumption goods in the future.

3.) Production Possibilities Curve

So to Summarize…

1.) Circular Flow.- a basic way of understanding how different parts of the economic system fit together.

FIRST BASIC MODELS OF THE ECONOMY

Households

Firms

G & Smarkets

Demand stuff

Supply stuff

pay money

earn income

F & Pmarkets

Demand stuff

Supply stuff

earn income

pay money

Government

transferstaxes

taxessubsidies

Demand stuff

Demand stuff

2.) Business Cycle- Looking at how the economy grows over time.

FIRST BASIC MODELS OF THE ECONOMY

Time

Short Run

Econ Growth

Long Run

2.) Business Cycle ModelPeak

Recession Trough

Expansion

3.) Production Possibilities Curve (PPC)

Production Possibilities Frontier (PPF)

Also called:

- a graph that shows the combinations of two goods the economy can possibly produce given the available resources and the available technology.

FIRST BASIC MODELS OF THE ECONOMY

0 100 200 300 400 500 6000

1,000

2,000

3,000

4,000

5,000

6,000

Axis Title

Axis Title

The PPC could be a straight line, or bow-shaped.

Depends on what happens to opportunity cost as economy shifts resources from one industry to the other.

3.) Production Possibilities Curve

枪炮

黄油

0 100 200 300 400 500 6000

1,000

2,000

3,000

4,000

5,000

6,000

Axis Title

Axis Title

Consumption goods

Capital goods

A

B

C

D

Any point that is ON the PPC is Efficient. It means the resources being completely used.

EfficientAll are

Points!

3.) Production Possibilities Curve

0 100 200 300 400 500 6000

1,000

2,000

3,000

4,000

5,000

6,000

Axis Title

Axis Title

Consumption goods

Capital goods

A

B

C

D

Any point that is WITHIN the PPC is Inefficient. It means the resources are not completely being used.

InefficientAll

Area!

3.) Production Possibilities Curve

0 100 200 300 400 500 6000

1,000

2,000

3,000

4,000

5,000

6,000

Axis Title

Axis Title

Consumption goods

Capital goods

A

B

C

Any point that is OUTSIDE the PPC is Impossible!

Impossible!

3.) Production Possibilities Curve

0 100 200 300 400 500 6000

1,000

2,000

3,000

4,000

5,000

6,000

Axis Title

Axis Title

Consumption goods

Capital goods

Economic Growth - Sustained expansion

of the production possibilities frontier

- to have economic growth means to increase the PPF so more can be produced without having to trade-off for as much.

3.) Production Possibilities Curve

0 100 200 300 400 500 6000

1,000

2,000

3,000

4,000

5,000

6,000

Axis Title

Axis Title

Consumption goods

Capital goods

A

Allocative Efficiency + Economic Growth

By producing more Capital goods today, that means you can have more Capital goods and Consumption goods in the future.

3.) Production Possibilities Curve

The End.

Thank you

Please view the next PPT about the PPC in more detail.