Modelling The Economy: PPC And CFI Flashcards
(20 cards)
Production possibility curve (PPC)
diagrammatic representation of the maximum combination of two products that an economy can produce when all its resources are used efficiently per time period
Point inside PPC
Resources not being used efficiently
Beyond PPC
Level of production not currently attainable with available resources and technology
Position on the curve
Represents maximum productive efficiency, zero wastage and full resource employment
Movement along PPC
Represents an opportunity cost, in order to produce more of good x, we must produce less of good y
Assumptions of the PPC
1) fixed production possibilities
2) scarcity
3) constant state of technology
4) efficiency
Marginal rate of transformation
Number of units or amount of a good that must be foregone to create or attain one unit of another good.
Shown by gradient of PPC
PPC = straight line
The marginal rate of transformation is the same, and the opportunity cost is constant
PPC concave outward
Shows that there is an increasing opportunity cost the more units of a product you produce
Features illustrated by the PPC
1) scarcity
2) opportunity cost
3) choice
4) resource unemployment
5) efficiency
6) actual growth and growth of productive capacity
Actual growth
Shifting of the PPC, related to an increase in quantity or quality of resources + technology
Circular flow of income model
Illustrates how economic activity and national income are determined based on interactions of economic decision makers
Income
Sum of the returns of all factors of production
Economic decision makers
- government
- firms
- households
Leakages
- taxes
- savings
- imports
Injections
- government spending
- investment
- exports
Closed economy
Part of the CFI Mindel, household supply factors of production to domestic firms who supply goods and services. In turn, firms provide factor income s to households, which is spent on goods and services creating revenue. In a closed economy, income flow us numerically equal to expenditure and output - there are no foreign imports or exports.
Open economy
- Domestic and foreign decision makers are involved
- the foreign sector facilitates international trade
- not all income spent on domestic good and services
- additional money can enter economy as government spending, export earning and investment expenditure
National income equilibrium formula
Savings + taxation + import expenditure = government spending + investment expenditure + export earnings
(S + T + M = G + X + I)
Assumptions of the CFI
- simple economy = no government sector + households spend all income with no savings or investments
- closed economy = no imports/exports
