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3.1 ~The Productions Possibilities Frontier: Macroeconomic applications PPF (Production possibilities frontier) shows all possible combinations of goods & services that is possible to produce in this economy given its resources & technology (the line- shows maximum) Will show u the max amount of good the economy can produce Macro uses aggregate goods (a group of economic units acting as a whole) Consumption good = a good that provides immediate satisfaction (ex: clothing or food or entertainment or medical care horizontal axis not a specific good just an aggregate measure of consumer goods- representation) Investment good = a good used to produce other goods (ex: capital or goods that produce other goods like a sewing machine or factory) Investment = business spending Product Possibilities schedule = table of data that shows; the maximum quantity of consumer goods that can be produced for any given quantity of investment goods produced Increasing opportunity costs occurs b/c some resources are better suited to the production of consumption goods, while other resources are better suited to the production of investment goods Points above the PPF are not achievable given resources and tech indicates the reality of scarcity ; points under the PPF represent underemployment or unemployment The downward slope reminds us of opportunity costs there are trade offs The cure gets steeper as we move down it b/c slope of curve reps opportunity costs; steeper it gets =larger the opportunity costs are getting Slope = rise (change in investment goods) Run ( change in consumption goods) Outward bowed shape of PPF indicates increasing opp. Costs If any variables that were previously held constant changes the whole curve must be redrawn Ex: improvement in tech. increase the production of investment goods Economic growth results from the accumulation of resources which improves overall production Changes in PPF War = overall output would be reduced b/c resources are being occupied or destroyed An increase in immigration= overall output would increase because of an increase in labor An improvement in technology for consumption goods= this improvement in technology increases the production of consumption goods Circular Flow Model Every time you spend money you create income for someone else Spending=Income Circular flow model = diagram illustrating the flow of spending & income in an economy Includes: Households (purchases- consumption; acquire $ by selling their resources like labor, land, etc) Firms (businesses; pay for factors of production w/money which becomes households income) Factors of Production: Households supply resourcesland, labor, & capital flow into the factor markets Factor markets land, labor, & capital is hired by firms Firms puts resources to work to produce goods & services Goods & services are provided by firms & enjoyed by households Flow is clockwise starting with households/resources... View Full Document

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