Circular Flow Diagram
- Shows how dollars flow through markets
among households and firms
- 2 types of actors: households and firms
- Two markets: a) goods and services, b) factors
of production
Factors of Production
- Resources the economy uses to produce goods
and services including: labor, land, capital, and
entrepreneurship
Households
- Own the factors of production, sell/rent them to
firms for incomes
- Buy and consume goods and services
Firms
- Buy/hire factors of production
- Use the, to produce goods and services
Production Possibilities Frontier (PPF)
- Graph that shows the combinations of two
goods the economy can possibly produce given
the available resources and the available
technology
- 2 goods: computers and wheat
- One source: labor (hours)
- Economy has 50,000 labors
PPF and Opportunity Cost
- Moving along a PPF involves shipping
resources from the production of one good to the
other
- Society faces of tradeoff: getting more of one
good requires sacrificing some of the other
- Slope of the PPF: tells you the opportunity cost
of one good in terms of the other.
Slope of the PPF
- Could be straight line, bow-shape
- Depends on what happens to o.c. as economy
shifts resources from one industry to the other
- If o.c. remainds constant, PFF is a straight line.
- If O.C. of a good rises as the economy
producing more of the good, PPF is bow shaped.
Summary of PPF:
- PPF shows all combinations of two guards that
an aeconomy can possibly produce given its
resources and technology
- Illustrates the concepts of trade off and o.c.,
efficiency vs inefficiency, unemployment, an
economic growth
- A bow shaped PPF illustrates the concept of
rising economy
Microeconomics and Macroeconomics
Microeconomics: how households and firms
make decisions show they interact in markets
Macroeconomics: economy wide phenomena,
inc. inflation, unemployment, and economic
growth
> Both are branches of economics
Economics as Policy Advisors
- Positive Statements - attempt to describe the
world as it is, and it can be confirmed
- Normative Statements - prescribe how the
world should be, cannot be confirmed
Why Economists Disagree
- Economists often give conflicting policy - Study of the aggregate acitivty of a nation’s
advice economy
- Sometimes disagree between validity of - Economics of a nation
alternative positive theories - Purpose of this field is to understand how
- Different values society can efficiently achieve goals such as
- Many prepositions about which most economic growth and development
economists disagree
Commanding heights:
Tools of Economists “The Great Depression”
- Logic 1929 (1.5 M)  1930 (13M)
- Mathematics
- Statistics Microeconomic models
John Maynard Keynes
Market Economy - Theory of Employment, money, and interest
- Goods and services determined by prices 
value of commodity and exchange Fine-tuning - gov’t’s role in regulating inflation
and unemployment
* 2 basic assumptions Recession - real GDP
1. Exchange - activity of buying and selling Depression - severe contraction and high
2. Nationality - behavior of people to maximize unemployment

Price System Major concerns: macro

- Production and consumption 1. Aggregate price level
- Consumers are given freedom to effectively 2. Aggregate output
influence the direction of economic activity 3. Total employment
4. The rest of the world and its relationship to
Macroeconomics the other economies
- Economy
- Nationwide phenomenon
- Bigger group firm  industry  national economy  global
- Nation economy

Microeconomics Economics - science: organized body of

- Households and firms knowlegde
- Smaller group
Concern - how groups of people make choices
Firms: maximum profit
Households: utility (Key assumption on how people make choices)
Economic rewards vs costs
Last 3 principles Translation: people are mukhang kwarta
Production *Corruption - costs is lesser
Prices rise if gov’t prints too much money
Inflation and unemployment
Macroeconomics What economists do:
- Explain why there is a slow pace of economic - Key actors
acitivites 2. Production Company
- Guess likely results - how much did the nation - Limited
earn this year? 3. As a family
- Develop ways to influence results - how can
we make the nation earn more? AS A MOVIE
- First: who are the actors?
Cardinal concern: the nation as a whole - Household and firms
- Government
Models > MAIN CHARACTERS <
- Simplify reality - Government, banks, workers, buyers and
- Economic issues sellers, salesmen, and investors
- Economists interpret facts - Household and firms (use money)

> Good vs bad models

- Good models are simple and have good track INFLOWS
rewards - Investments
- Government spending
What do macroeconomists need to their work? - Exports
a. Model - how economy works OUTFLOWS
b. Facts - organized according to the models - Savings
- Taxes
(Key indicators) - Imports
- Trends and growth of market segments
Why worry about over-heating?
1. Income and production by producing units - Sudden price jolts creates uncertainties
- Agriculture - Uncertainties make people short oghted
- Industry - Long-term investments get undermined
- Services by market description - Long-term growth suffers
- Local markets How do we detect over-heating?
- Exports - Usual indicator: upward pressure on prices
- Prices of what? Price of the economy's scarcest
2. Spending by spending units production input
- Private consumption and investment
- Government consumption and investment by Over-heating
origin of goods - Uncertainty
- Local goods - Future bleak
- Imported goods  indicators to assess - Slow growth of the economy

The economy as a household:

- It earns and spends
- Can let you spend more than your income
- Others must finance deficit
1. As a movie - If no one wants to lend, invest or donate...
- Deficit spending can get you into trade

How do we asses the financial health of a

household:
(Key concerns)
1. Cash position
2. Balance between income and expenses
3. Access to other people's money
WHY? Cash reserves are needed for
emergencies

- Somebody else must finance deficits

- There are limits to a household's access to
other people's savings
- Financial irresponsibility leads to troubles

When does a household get into trouble?

- Runs short on funds
- Can't save its expenses
- Different to ask other to financial deficits
- Income-spending balance nation's standpoint
- Closed economy
Income = expenses
- Open economy
Income = expense -imports & exports ->
Income - expenses = exports - imports

Deficit sending from a nation's standpoint

- Basic macroeconomic reality
Income - expenses = exports - imports
- Implication: A nation's deficit needs to be
financed of foreign currencies

Gross Domestic Product - market value of all

final goods and services produces within an
economy in a given period
GDP - Total Production -> Income=Expenditure
*4 Components:
1. Consumption
2. Investment
3. Government purchases
4. Net Exports