Chapter 3 Notes - Chapter 3L Interdependences and the Gains...

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Chapter 3L Interdependences and the Gains from Trade The Circular Flow Diagram o Economy is simplified to include only two types of decision makers Firms : produce goods and services using inputs such as labor, land and capital (buildings, machines, etc)[Factors of Production] Households: own the factors of production and consume all the goods/services that firms produce o Markets for Goods and Services Households are buyers Firms are sellers Households buy the output of goods and services that firms produce o Markets for the Factors of Production Households are sellers Firms are buyers Households provide the inputs that firms use to produce goods/ services The Production Possibilities Frontier o Graph that show s the various combinations of output that the economy can possibly produce give the available factors of production and the available production technology that firms use in order to turn these factors into output o
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