Marcos L. Lerona
June 13, 2013
Definition of ‘Production Possibility Frontier – PPF’
A curve depicting all maximum output possibilities for two or more goods given a set of inputs (resources, labor, etc.). The PPF assumes that all inputs are used efficiently.
As indicated on the chart above, points A, B and C represent the points at which production of Good A and Good B is most efficient. Point X demonstrates the point at which resources are not being used efficiently in the production of both goods; point Y demonstrates an output that is not attainable with the given inputs.
Definition of ‘Circular Flow’
The circular flow diagram (also called the circular flow model) is perhaps the simplest diagram/model of economics to understand. In essence, the circular flow diagram displays the relationship of resources and money between firms and households. Every adult and even most children can understand its basic structure from personal experience. Firms employ workers, who spend their income on goods produced by the firms. This money (income spent by workers which turns into revenue by firms) is then used to compensate the workers and buy raw materials to make the goods. This is the basic structure behind the circular flow diagram (seen below.) The Graph
In the model, firms and households interact with one another in both the product market (or goods market) and the factors of production market (or factors market). The product market, as mentioned in the name, is where all products made by businesses/firms are exchanged. The factors of production market is where inputs such as land, labor, capital, and other resources are exchanged. Households earn money by selling their “resources” (most often labor) to businesses in the factor market. In return, households receive income. The price of the resources the businesses purchase (labor from households) are the “costs.” From the resources...
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