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chapter 2 - Chapter 2 Circular Flow Model Firms buy factors...

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1 Chapter 2 Circular Flow Model – Firms buy factors of production from households and sell goods and services to households. – Households sell factors of production to firms and buy goods and services from firms. Our First Model: The Circular-Flow Diagram • The Circular-Flow Diagram : Includes two types of “actors”: – households – firms Includes two markets: – the market for goods and services – the market for “factors of production” Factors of Production • The factors of production They include: – labor – land – capital (buildings & machines used in production)
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2 FIGURE 1: The Circular-Flow Diagram Markets for Factors of Production Households Firms Income Wages, rent, profit Factors of production Labor, land, capital Spending G & S bought G & S sold Revenue Markets for Goods & Services Our Second Model: The Production Possibilities Frontier • The Production Possibilities Frontier (PPF) : • Example: – Two goods: computers and wheat – One resource: labor (measured in hours) – Economy has 50,000 labor hours per month available for production. PPF Example Producing one computer requires 100 hours labor. Producing one ton of wheat requires 10 hours labor .
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