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ECO 1104 Chapter Notes - Chapter 2: Marginal Cost, Opportunity Cost

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School
University of Ottawa
Department
Economics
Course
ECO 1104
Professor
David Morgan

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ECO 1104 Full Course Notes
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ECO 1104 Full Course Notes
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Document Summary

Inner loop represents the flow of inputs and outputs, outer loop represents the corresponding flow of dollars: since the model is circular, everything that happens will inevitably affect each part of the model. Economist is a social scientist: cannot do controlled experiments in a lab setting, look for natural experiments" that occurred in the real world, usually involves finding relationships in economic data. Positive statements: economist as a scientist, claims that attempt to describe the world as it is, can be proven or disproven, no value in belief system attached, does not need to be true, just provable/disprovable. The shape of the ppf: ppf could be a straight line or bow-shaped, depends on what happens to opportunity cost as economy shifts resources from one industry to the other. Cost remains constant, ppf is a straight line. Cost of a good rises as the economy produces more of the good, Military spending vs. consumer products (low opp.

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Related Questions

The economy's income and expenditure The following diagram presents a circular-flow model of a simple economy. The outer set of arrows (shown in green) shows the flow of dollars, and the inner set of arrows (shown in red) shows the corresponding flow of inputs and outputs.
 
 
Based on this model, households earn income when ________ purchase _________ in markets for factors of production.
 
(i) firms; labor and capital
(ii) households; goods and services

A. Based on the model, firms earn revenue when ______________(firms, households) purchase ___________(goods and services, labor and capital) in markets for goods and services.

B. Suppose Kate earns $800 per week working as a doctor for the Medical Clinic. She uses $9 to order a mojito cocktail at Little Havana. Little Havana pays Hubert $300 per week to wait tables. Hubert uses $175 to purchase medical services from the Medical Clinic.

a. Identify whether each of the following events in the scenario occurs in the market for factors of production or the market for goods and services.

Event The market for Factors of Production The market for goods and services
Kate spends $9 to order a mojito cocktail.    
Hubert spends $175 to purchase medical services for the Medical Clinic.    
Hubert earns $300 per week working for Little Havana.    

b. Which of the elements of this scenario represent a flow from a firm to a household? This could be a flow of dollars, inputs, or output.

    Kate's labor, The Mojito Kate receives, The $175Hubert's spend to purchase Medical services from the Medical Clinic.

c. The actual economy is more complicated than the one illustrated in the previous circular-flow diagram of a simple economy. True/False.

What is the market for factors of production?

  1. What is the market for factors of production?

    1. The market for factors of production is where households and firms interact to trade factors of production for factor payments. For example this is where people provide firms with labor and firms pay them with wages. 

  2. What is the money market?

    1. The money market is where households, firms, and the government may save and/or invest their money to earn interests. Money market includes banks, stock market, bonds market, and other financial institutions where economic actors can buy and sell financial assets to earn interests and/or dividends.

  3. Who are the three economic actors in the circular flow model?

    1. In a circular flow model, the three main economic actors are the households, firms, and the government. Households include the typical individual consumers. Firms include businesses and similar producers in the economy. Finally, the government refers to the whole government system from federal to local level.

  4. How is the national income of an economy determined?

    1. The national income of an economy is determined by measuring the total value of the output produced in an economy or the total income earned by the actors in the economy. In a circular flow model, we can see that the value of total output produced should equal the total value of income generated and earned in the economy. This is because every dollar spent by someone in the economy is received by another person in the economy as income.

  5. What is GDP?

    1. The gross domestic product or GDP represents the sum total of the value of the final goods and services produced within the economy for a given year. It is the most commonly used measure of its economy’s productivity and income.