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Unformatted text preview: T HE C IRCU LAR FLOW a.) Goods = goods and services NOTE: Goods are also known as outputs, or if were referring to all goods collectively, output. b.) Resources = inputs into the production of goods OTE 1: Resources are also known as factors of production. NOTE 2: The two resources we will consider are labor and capital (capital = goods used to produce other goods). We thus include land as part of capital. c.) Production technology = the particular way in which inputs are combined in the production of goods .) T HE PRODUCTION POSSIB I L I T I ES MODEL a.) Scarcity = the limited nature of societys resources b.) Suppose two goods, A and B, are produced during a given period of time. Opportunity cost of A = change in quantity of B / change in quantity of A Opportunity cost of B = change in quantity of A / change in quantity of B NOTE 1: In the above, opportunity cost of A means it is good A that is being increased. Therefore, B will be the good that must be decreased to get more of A. Similarly, opportunity cost of B means it is good B that is being increased, and so A will be the good that must be dec= the absence of waste NOTE: Thus, efficient production means that goods are produced using all available resources (i.e., no resources are wasted). d.) The Law of Increasing reased to get more of B. NOTE 2: There is a minus sign implied in each of the above two equations, in the sense that we must give up one good (-) to gain more of the other good (+). But we drop the minus sign because the word cost implies the same thing. In any cost, you must give up the thing in the numerator to gain the thing in the denominator....
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- Spring '08