EC 111 Lecture Notes - Lecture 3: Opportunity Cost
Document Summary
Model: highly simplified representation of a more complicated reality. Circular-flow diagram: visual model of the economy, shows how dollars flow through markets among households & firms. Households: own the factors of production, sell/rent them to firms for income, buy and consume goods & services. Firms: buy/hire factors of production, use them to produce goods and services, sell goods & services. Factors of production: inputs; resources the economy uses to produce goods. Capital (buildings & machines used in production) Ppf: graph that shows the combinations of two goods the economy can possibly produce given the available resources & technology. Moving along the ppf involves shifting resources (labor) from the production of one good to the other. Slope of the ppf tells opportunity cost of one good in terms of the other. Depends on what happens to the oc as economy shifts resources from one industry to the other.