The Circular Flow

Going to focus on a basic economic concept that is fundamental to our study, Market Economics . A market is simply a place where buyers and sellers meet to engage in mutually beneficial exchanges with another. In a market economy there are two fundamental types of markets that must exist for mutually beneficial exchanges, in which households and firms engage in exchanges, in both resources markets and product markets, that Benefit both the firms and household themselves. This lesson is going to illustrate the flow of goods services, land labor capital and market economy between households and firms and seek to understand how the trades that take place in a market economy, so let's start off whit a couple of definitions here.

First let's at the household side of our graphs. We see that household possess three scare resources, in the case of land labor and capital these are all resources that exist in finite amounts in the world. Land resources are those that can be used to grow crops, to mine minerals, to catch fish, to log forest, all of the land resources. These are the resources, this is 5 any input into de production of a good or service that involves workers. We're talking about high-skilled workers, educated people an neucated act to the production or something is considered labor. Capital, this is the technology that is used to produces goods. Capital resources, also include things like Factory equipment, tractors for farmers, any sort of technology that is used in the production of good, Households are the owners of these scarce resources the land is held by either private individuals or households trough the public sector. Labor is workers that live at home and go to work at Factory or in and office every day, and capital, we provide capital to the marked economy through our savings of money. That will be explained a Little bit later on, when it comes to how firms acquire capital in the production of goods and service so there you see one side of the circular flow model of a market economy. We see that households possess three productive resources, land labor and capital, we must exchange these resources in the resource market.

So the first flow that we're going to illustrate in our circular flow is the flow of resources from households to firms in the resource market. Now, why do firms need resources? What are firms going to do with the resources that they get from households in the resource market? As we can see in the left side of our circular flow model, firms are established by entrepreneurs or individuals from households that wish to start business in order to make some money. Now, entrepreneurs and the firms that they run need resources in order to make some money. So, firms will wish to acquire resources from households that they can put these resources to use to make goods and services that they can sell back to households. So, the resource market is where the circular flow begins. Firms are buyers in a resource market; firms buy resources; households sell resources, and the resources that are being bought and sold are land, labor and capital. So, in the circular flow we should see resources flow from households to the resource market to firms. So they can be employed in the production of goods and services.

We also learned that in the world of scarce resources there is nothing free therefore, firms must give something up in order to acquire these three scarce resources, and that's where money comes into play. Money is what makes a circular flow function. Firms or the entrepreneurs to start the firm's must have money at their disposal in order to begin a business. With some money firms can exchange in the resource market for the land, labor and capital they need. So, in the other direction in our circular flow model, we're going to see money flowing from firms to households. Money of course, is what make the circular flow function. Households are providing land, labor and capital in the resource market, which are the factors of production. These are the things that firms need in order to make goods and services,  but in exchange for these things the firms are going to pay money to households. The money that firms pay to the households in the resource market, is income for households. For our labor households earn wages, for our land we earn rent, and for our capital we earn interest. These money incomes are the incentive that households have to provide land, labor and capital to firms in the resource market. Now, why do we care about money? Anybody who has ever been shopping knows why money is important. Money is what allows good and services that they demand in the product market. So now we´ve got half of our circular flow model made. We see that households resources in the form of land, labor and capital to entrepreneurs to the firms in the resources market. These act as factors of production for firm which they can use to make goods and services which they can sell us in the product market but nothing´s free in the market economy, so, of course, money has to flow in the other direction. Money in flowing from firms to households in the resource market. Where are we in the model, see the money has changed hands in the resource market. Households have earned money but what good is money if not to consume with? So what our households going to consume. This brings us to the product market with the factors of production, with the land, labor and capital that firms have acquired in the resource market. They can begin manufacturing or producing goods and services. So, we should start to see production occur in the market economy. So now, firms have lots of goods and services which they have produced using the resource acquired in the resource market of course, the reason for the production that firms have undertaken is to sell. A market economy is all about selling: Household sell resources in the resource market, and firms, sell goods and services in the product market. So, we should start to see these goods and services flow counterclockwise in the product market towards households , and that´s exactly what should happen next in product markets firms are the suppliers and household are the demanders, so firms sell and household buy products. Of course, nothing is free economy order to acquired these goods and services that they so demand. We can see goods flowing to households to firms. So that firms are earning the profits that they so desperately seek. We will see money flow from household to firms in the product market. So it´s a little bit difficult to see here but, what we should notice is that there are arrows indicating the flow of money, land, labor capital and goods and services a circular flow model that in this case, money is always flowing counterclockwise and resources goods and services are always flowing clockwise. The goal of firms and households in this model of the markt economy are very clear. Firms are profit seekers, so the goal of firmsis to maximize profits. To do this firms must sell their goods and services for more than they spent an resources. That ‘s the definition of a profit essentially. It’s when a firms total are greater than its total cost. In other words, it’s sold for more than it costs to produce.

And the goals of households what is the goal of households? The goal of households is to maximize utility. You may be unfamiliar witch this word utility but it has a simple definition in economics, and that is we’re going to simplify dramatically here, we’re going to say that happiness is achieved trough consumption of gods and services. So, recall a market is a place where buyers and sellers meet to engage in mutually beneficial exchanges. Look again at our resource market.

How do households benefit from providing land, labor and capital to firms in the resource market? Well, they do so because they are earning money incomes households of course are. Well they do so because they are coming money incomes. Households, of courses, are earning incomes in the form of wages, rents, interests and profits for the entrepreneurs who start the businesses. With these money incomes, households can ultimately acquire the gods and services that they demand in the product market. The good of any household is to earn a high enough money income to enjoy level of consumption of goods and services that improves the family standard of living. Now, let´s look at the product market. Firms, recall our seeking profits, the goal of firms should be to end up with more money that they started with their gods and services that they produced using the resources acquired in the resource market back to households. Hopefully for a profit, earning greater the firms incurred in costs. So, the beneficial nature of the market economy exists in so far, that households willingly supply their resources land, labor and capital, to firms with the ultimate goal of earning money incomes which can be used to buy goods and services, which provide households with a utility or happiness. Firms on the other hand, willingly provide goods and services to households in exchange for the money that they previously had paid those households in the resources markets. The goals are the maximize profits and to maximize utility. This is the essential nature of a market economy. Without these incentives, without these goals of households and firms, a market economy would simply not function and resource allocation would have to be understand by another mechanism altogether, such as government control or a command system of same.

Questions:

1.Market definition:

A market is simply a place where buyers and Sellers meet to engage in mutually beneficial exchanges with one another.

2.What types of markets exist in the market economy?

There are two fundamental types of markets; the Resources Markets and the Products Market.

3.What represent the firms and the households in the model of the circular flow?

The firms represent business companies in the model circular flow and the households represent families or consumers.

4.What explain/illustrate the circular flow economic model?

Illustrate the flow goods and services, land, labor, capital and money, and seek to understand how individuals stand to benefice from the trades that take place in a market economy.

5. Which ones are the scarce resources that belong to the households?

The three scarce resources are: land, labor and capital (these are resources that exist in finite amount in the world)

6. What is the meaning of "labor" in economy? Examples

This is workers that live at home and go to work at a factory or in and office every day. Builders or lawyers are some examples.

7. What is the meaning of "capital" in economy? Examples

We speak of "capital" when we provide money to the market economy through our saving. When we invest money, for instance

8. What is the meaning of "land" in economy?

The land resources that can be used to grow crops, to mine minerals, to catch fish, to log forest, etc.

9. How work the flow between the firms and household in the Resource Market?

We see that households possess three productive resources, land labor and capital, we must exchange these resources in the resource market.

The firms that they run need resources in order to make some money. Now, entrepreneurs and the firms that they run need resources in order to make some money. So firms will wish to acquire resources from households that they can put these resources to use to make goods and services that they can sell back to households. So the resource market is where the circular flows begins.

10. The factors of production are land labor and capital

these act as factors of production for firm which they can use to make goods and services which they can then sell us in the product market.

11. The money incomes of the households is called: income

For the labor they earn: wages

For the land they earn: rent

For the capital they earn: interest

12. What the households do with the money that they have earned in the Resource Market?

They do so because they are earning money incomes. Households, of course, are earning incomes in the form of wages, rents, interests and profits for the entrepreneurs who start the businesses. Wirth these money incomes, households can ultimately acquire the goods and serivces that they demand in the product market.

13. What happen in the product markets?

In product markets firms are the suppliers and households are the demanders, so firms sell and households buy products. Of course, nothing is free in a market economy in order to acquire these goods and services that they so demand. We can see goods flowing to households, but that doesn't come free, money must change hands. Money must flow clockwise from households to firms. So, that firms are earning the profits that they so desperately seek.

14. What is the goal of Firms and Households in the Market economy?

The families act as claimants of said products and, exchange they must deliver to the companies money that represents the price of side articles.

15-What means “profits”?

Is a term used to designate the benefits obtained from a process or economic activity.  

Economic System

Video 4:

Nearly every society in the world faces the fundamental problem, how to distribute limited resources to people in a way that will be fair and effective. This is what is called scarcity and different societies approach this problem in different ways. There are four essential types of economic systems.

·         The traditional economy is based on culture and rituals, and is focused on the community as a whole. Everyone pitches in and benefits from everyone else his efforts. Small societies focused on subsistence farming and hunting are considered traditional economies. An example would be a traditional Inuit village in North America.

·         A command economy relies on the government to make all economic decisions, including allocating and distributing resources and regulating prices and wages. A modern example of a command economy would be North Korea.

A market economy is driven by consumers whose decisions determine how the industries and financial markets will operate. Individuals choose how their resources are used what goods to make what services to provide and what jobs to take.

In a pure market economy there is no government involvement because of this there are no true pure markets economies.

·         Most societies today have mixed economies. Which utilize limited government involvement while also applying free-markets. One example would be the United States. However nearly all other countries are formed of mixed economy as well, each is unique and faces the challenge of finding proper balance between consumer choices and government control.

Activities:

1. What is the fundamental economic problem in every society?

One of the fundamental problems is scarcity of resources because the humans are misers and they can't use all the resources.

2. What kind of societies are considered traditional economies?

The traditional economy is based on culture and rituals, and is focused on the community as a whole. Small societies focused on subsistence farming and hunting are considered traditional economies

3. Which are the characteristics of a command economy? Example

The government is the one that he puts the price of the things and say what to produce, how to produce and for whom it is produce. Example: North Korea

4. North Korea economy. Explanation

In North Korea the is command economy. North Korea economy is driven by consumers whose decisions determine how the industries and financial markets will operate individuals choose how their resources are used what goods to make what services to provide what jobs to take

5. Which are the characteristics of the market economy? Example

The consumers. They are the only ones who answer to questions of production. So, when you're looking at what to produce, it is completely and totally up to consumers. When you look at how to produce it, businesses are the ones who choose what they're going to produce and then, if consumers don't buy, the businesses go out of business. And for who to produce these goods, it's based on consumer income. If they can afford it, they can buy it. There is no government regulations which means that absolutely nothing would be illegal. If there is a market for it, people can buy it, so there are no protections for consumers.

6. Difference between the mixed economy and the pure market economy?

That the mixed economy uses limited government participation and the market economy is driven by consumers decisions.

Economics System

Video 3:

We are going to talk about types of economics systems.

There are four different types of economic systems and three basic economic questions, that each one answers. And the reason, they're different because they answers two questions differently: they look at what to produce, how to produce it and for whom to produce it. Those are three basic economic questions and you need to be absolutely certain that you know what those questions are.

·         The first type of economic system is a traditional system, this is an economy based on custom. There are not very many of these. In the past, this has been probably the most popular.

Ekismo culture or the Australian Aborigines are in some of these real isolated places that live on subsistence agriculture but they just grow enough for themselves. When they look at to produce it is needs for survival. They produce basically through hunting and gathering. And then, for whom to produce it, they make everything for themselves, so there's very little. This is very difficult to find in the modern world

·         The second one is a command economy. In this command economy, the government is the entity that answers the questions of production. In deciding what to produce, the government makes that decision. In deciding what to produce, it the government plans at what factories. They are going to have what jobs people are going to have. The government controls everything. The government decides how to use their resources. This has been the type of economy system that is more common in socialist governments. This is the form of government of a form of economic system that was in the former Soviet government. Basically, the Soviet government said we're going  to make bread on Wednesday. People are going to buy bread on Wednesday and that's all that's going to be available.

·         The third king is a market economy. This one is also a pure market economy where people are consumers. They are the only ones who answers to questions of production. So, when you're looking at what to produce, it is completely and totally up to consumers. When you look at how to produce it, businesses are the ones who choose what they're going to produce and then, if consumers don't buy, the businesses go out of business. And for who to produce these goods, it's based on consumer income. If they can afford it, they can buy it. With a pure market economy, individuals are the ones that are in control. Economy individuals are the ones that are in control. There is no government regulations which means that absolutely nothing would be illegal. If there is a market for it, people can buy it. There is no government regulation, over anything that is produced. There is no government regulation over business, so there are no protections for consumers what so ever in a pure market economy.

·         The Fourth Kind is a mixed economy. This is what most countries around the world are in a mixed economy consumers and business make those decisions about the economic questions. But there is some government control, businesses and consumers decide what to produce, but the sets up regulations to protect consumers from bad products, from products that are unsafe, from businesses taking advantage of them that kind of when you look at how to produce it. The government set safety standards. Thing like child labor they have to be certain work standards and factories or things like that. The government will stop it and fine the companies or shut them down. When you look at who the goods are produced. It's based on consumers income, but there's also some government assistance for people who can't afford certain services. There is in a mixed economy some government regulation but it is mostly for the protection of consumers.

Questions:

1. Which are the three basic economic questions?

- What to produce?

- How to produce?

- Whom to produce?

2. Which are the economic system?

Traditional system, command economy, economy market pure and mixed economy

3. The traditional system is based on...?

This is an economy based on custom

4. The traditional system make enough for..?

They just make enough for themselves and for their family

5. Who respond the answers of production in the command system?

The government is who responds the questions of what produce, for who produce, how produce and the amount to produce

6. What does the government plans out in the command economy?

The government plans which factories to produce and the jobs that people will have and what to produce

7. Who decide how to use the resources of a country in a command system?

The government controls production, so he decides what to produced and the amount of resources to use for it

8. Who answers the questions of production in the pure market economy system?

The consumers, they choose trough their purchases, the quantity is produced and what produced

9. For whom produce the goods in the market economy?

People that they can pay the price of such goods

10. Who answers the production questions in the mixed economy system?

Private agents of households and companies

11. What's the meaning of "government regulation" in the mixed economy?

The government sets the prices or quantities of production. Besides, the government established the rules that citizens and companies must achieve for participate in this type of economy

12. Who consume the goods and services that business produce in the mixed economy? What happen with people that can't afford to consume them?

- People with the necessary incomes for it

- The government helps people that they can't pay such goods

Production Possibilities Frontiers

Imagine a country in which there are only two goods to consume, oranges and cellphones. Let's, put thse two things on a graph. The vertical axis, represents the amount of oranges produced by our imaginary country in one month and the horizontal axis, the amount of cellphones produced in our imaginary country in one month. Let's, put some numbers on the axes. Maybe they represent millions of oranges and millions of cellphones. Let's, call our fictional country orange Stan.

Orange Stan has some choises to make. Suppose that if they put their resources intro producing oranges. They can produces up to four units of oranges. If they put all their resources into producing cellphones, they can produce up to two units of cellphones, but organistan isn't just stuck with these two options. Orangistan could also produce some, each of good.

There is not leisure are no books there are no movies producing inside the PPF make no sense, the citizens of Orange Stan would be happier producing on the line.

But why stop at the line. If more is better, why not produce outside the PPF. A point like this one is not feasible. Sure Orange Stan would love to have more of everything but, they have limited resources and their current technology does not allow them to produce at this point. That's why the PPF is a frontier. It's the edge of what is posible. But what if they discovered more resources, or a new technology allowed. Then, to make better use of the resources they already have, the production possibility frontier might shift or move. Suppose they become able to produce everything, for example, that is it they're producing all oranges, they could give up two units of oranges and get one unit of cellphones. As they continue to give up oranges and get one unit of cellphones. As they continue to give up oranges and get cellphones the line grow up until touches both axes.

This line is called a production possibilities frontier of PPF. The production possibilities fronties shows us all the combinations of orange and cellphones that can be produced the citizen of Range Stan could choose to produce at a point inside the PPF.

We say that this point is inneficient because Orange Stan could have more of both goods at no cost. That is there's no reason to produce inside the PPF. It's not as though gives the people in Orange Stan more time to relax, or read a book or go to a movie in our imaginary world there are only to consume Orange and cellphones.

The improvements in techonology causes the PPF to move away from the origin. Now our fictional country can produce more of both, and cellphones. In fact, the PPF has moved so much, that the point that was previously impossible, has become able to take advantage of new resources, or if anything else happen to increase their to produce for examle, suppose Orange Stan discover and island on which the soil was especially good for growing oranges.

Notice that PPF rotates, with a maximum amount of orange increasing, but the maximun amount of cellphones not changing. We've already seen one argument for trade. When people voluntarily exchange with each other they are better. Now that we know what a production possibility frontier is, we can use it to see another argument fortrade.

Questions:

1. What does the line of PPF represent?

It's the limit of production that a country can produce using in efficient way their resources.

2. What happen when the production (represented with a point) is inside of the PPF and not on the line?

When you are inside of the PPF line, you are inefficient because you are losing resources.

3. Why not produce outside the PPF line? It is feasible? Why?

No, because the country hasn't got the necesary resources to produce beyond its possibilities.

4. How will be possible to produce outside the PPF line?

Increasing the resources and/or the technology.

5. Why do we say that the PPF is an economic model?

We say that the frontier of production is an economic model because through theorical combinations in productive factors it's possible to know how to reache the maximun production.

Introducing Economics

Every course in textbook starts with on attempt to define economics, definition differ but after you hear a few of them you showed have a flaw or for what economics is about. When I tell people I am economist the first thing they usually say is either wha's the stock market going yo do next for how should I invest my money? I'm always sad to hear that questions. There are two reason why:
The first reason is that I don't have answer. There is some interesting economics behind why I don't have good answer but this is not the time to talk about that.
The second reason why those questions make me sad is that economics isn't really about money or stocks. Well, it is part about money but money in the stokes and other financial subjects are only part of economics... Personally, I don't find finance to be a very interesting part of economics. Other of course does, so again what is economics? Let's see some definitions.
Greg Nunking says economics is the study of how society manages its scare resources. Altough it would be more accurate to say that economics is a study of how individuals manage scarce resources.
Courtney defined economics , as a study of human behavior, with an emphasis on human decision making. That's a pretty good definition too, although it's a worth painting out that economy is a study of human behavior not the study if human behavior.

Steven Lindosborg defines economics as one of several science that treats to explain human behavior. Bur it differ form other disciplines like psychology and sociology, but there are some like DanAriel, who are economists but heavily emphasized the ways in which peopleple engage in national behavior. Also economists crossing over into what we're once considered sociology, psychology or even demography.
The first time, I took an economics class I was given a definition something like this: Economics is a study of how people choose to allocate scarce goods and resources to satisfy their unlimited desires. Again this is a pretty good definition; it has individual, choosing and scarcity themes that will come u again in my economic course. This definition provides a god opportunity to define some other terms that are important in economics.
Goods are thing that people like to use, way say that people consume. Then bads are hings that people must be paid to acept. For example, a sandwich might be a good, if you like sandwiches and garbage is probably a bad, for most people.

To convince you to take my garbage I have to pay resources thay we use to make things layer: tools and equipment, oil, timber, iron and so on there are all resources. I've sometimes herad people use this definition as well: Economic is the study of how people respond to incentive. We'll look at some key economic concept. Once you've heard them you'll have a better idea of what economics is and gow economists think about is to do some economics.

Although they differ from text to text. I'm going to present just three key economic concepts but I'll sneak in a few additional ideas through each key concept.

Scarcity means that stuff is limited. We can't all have as much of everything as we likr. Maybe we'd all like to have big house with swimming pools and a bunch of robot to clean it for us or maybe we'd all like to get the latest electronic gadgets on the fastest can or whatever right now. However it's not posible for us all to have everything we want. Maybe we could have a big house but no if we also want toe at and have fancy electronics and so on. We have to give up something to get the thing we want. Every time resources are used to male one thing that means thay are not making something else. Therefore we have to make trade-offs. We must trade-off one thing for another. Top up in another way we must make choices. I can spend a dollar and apple but that means I can't use that dollar to buy an orange.

This holds true for everything. Every choice we make involves doing one thing instead of another. The value of the best thing we give up is called opportunity cost. So if I hoose to spend one dollar tobuy an Eden Apple and the next best thing I could have chosen was a one dollar orange, then the buy orange was the opportunity cost of that Apple. Economists focus on opportunity cost as the true cost of making a choice. The opportunity cost is not necessarily the same as the monetary cost. Notice that I did not say that opportunity cost of the Apple was one dollar.

If goods and resources are scarce then nothing is free. Everything you get requires giving up something else I sometimes have. Religious friends as students who try to argue that salvation is free as environmentalist might argue that enjoying nature is free but they're both wrong salvation cost you at least a few minutes that could be spent doing something else and it probably requires giving up lots of fun sinning. Enjoying nature isn't free either since that nice nature stuff could be used to do something else and your time enjoying it could be spent playing nature might be worth you're a while but they're not free.

We usually asume that people became rationally. By rational we means to achieve their goals. Why would we asume something that we know to be false because it's a useful lay. No, I'm serious. Economists routinely used simpliflying assumptions which are useful. Lies that make the world comprenhensible. We use these assumptions to build models which are frameworks for trying to understand a part of the world.

Without simplifying assumptions the world is too complicated to understand. For example, of you want to understand how flight works you don't build a complete airplane form the ground up woth ailerons and flaps you build a simple little, fixed wing and then you blow arrow over it to see what happens. Once you understand the simple model then you can make it more complicated. Economists asime rationally because it is a useful lie it is a useful assumption because it predicts so well in so many circumstances, particularly the sorts of circumstances economists have traditional studied. We know it's not, always correct, but rationality is a powerfully useful simpliflying assumption. People who choose rationally, change. Their decissions when circumstances change. They respond to change in incentives an incentive is just a reason for doing something if the vost of doing something goes up people do more of it, for example, hamburgers become cheap people eat more of them.

New information becomes available showing that burgers will kill you, people eat fewer of them,,, these changes and incentives changes behaver economist talk a lot of about rational people seeking decisions at the margin. What they really mean is that people decide whether to do a little bit more of something or a little bit less of something. For example if you run a business growing and selling potatoes, you might consider growing little bit more to figure out if that's a good idea, you'd wnat to compare the marginal benefit. The benefit of marking a bit more money, from growing a few more potatoes. If stuff that could have been done with the resources you use to grow a few more potatoes, if not then the marginal benefit is created in the marginal cost, you grow a few more potatoes, if not then you don't. We'll explore this topic in excruciating detail later.

We got a bit sidetracked there but now we're back to the key economic concepts. Compared to the general public, economist are much more supportive of the idea that things work out When people are allowed to buy and sell things to each other in particular economist. Overwhelmingly believe that people in different countries are made wealthier when they are allowed to trade with each other without any tariffs, quotes or other government restrictions on trade. Trade is just what If sounds, like the exchange of goods and resources between people or between geographic areas. So Japan sells cars to the US and the US sells financial services to Japan, that's trade.
When economists talks about the market for apples, he or she means all those apple buyers and apple sellers talking to each other trading money and apples to each other. Economist again differ from the general public in that they tend to believe, with some disagreement, that when people buy and sell things at whatever prices they want, they tend to be made happier. This is not to suggest that markets always work, there is a large literature on market failure.

When markets fail, governments might be able to improve the situations those should be considered special cases however before you learn how markets fail, you need to understand how they succed. We will do a lot of this particulary using the supply and demand model. There are other important ideas that some textbook state as fundamental economic concepts, for example: maybe the fact that inflation is caused by government money too quickly is an important economic concept or perphaps the idea that economists try to look for hidden secondary effects of a policy change, something important to economics. I don't think so, however these and other concepts are important implications of the ideas discussed above but up to this point, I wanted to focus only on the absolutely most important, most fundamental economic ideas.

There are many sub disciplines with in economics that can be roughly grouped  into microeconomics and macroeconomics. Microeconomics concers itself with economic decision-marking on a small scale. If focuses on consumer's workers businesses, usually called firms and how they interact through markets. Microeconomics might even consider the interaction of a couple different markets at the same time. When one gets much bigger than that however one starts to get into macroeconomics. Macroeconomics concers itself with economic aggregates. Wich are measures of how the economy overall is doing. Examples of economic aggregates are GDP which are measures the value of stuff produced. Inflation wich is measure of how prices go up over time. In unemployment which is how many people are not employed isn't it and now.

Something that is worth remembering but not big enough to countas a key principle. Keter asparagus is a latin phrase that means other things the same or other things equal. As I said before, economists use models to describe the world. When we are construing an economic model, we have to assume away some complications. By assuming that other things are the same we mean that we're only going to change one little thing ans see what our model predicts. So, for example, if we want to know how consumers will react if the price of bananas goes up we will assume that the price of bananas is the only thing changing. Incomes aren't changing the prices of other fruits.
Once we are comfortable with our basic model, we might be able to change more than one thing at a time and see what happens. Always start simple however. You'll see what I mean when we see the production possibilities frontier, our first model, let me say a little bit more about economic models. Most economics classes are really a series of models designed to describe a particular situations. You go from model to model learning how they work and when they should be applied. The veers model we'll see is the production possibilities frontier.








Concepts:
Economic definitions: Economics is the study of how society momages it's score resources
Economics as a study of human behaviour with an emphasis is human decision making.

Goods and bads: Goods are things that people like to use. Bads are things that people must be pend to accept.

Resources: Resources are what we use to make things, labor tools and equipment.

Scarcity: Scarcity means that stuff is limited.

Opportunity cost: The value of the best thing we give up to get something.
This holds true for everything every choice we make involves doing one thing instead of another, the value of the best thing we give up is called opportunity cost.

Rationally: To achieve their goals, which implies that they respond to incentives.

Economic model: A simple framework for understanding an economic phenomenon, which unnecesary complications assumed away.

Incentive: A reason for doing something

Margin: Marginal benefit- Marginal cost: Is the benefit, satisfaction, pleasure or happiness that a person receives by the comsumption of an additional unit of good or service.

Markets: The set of buyers and sellers, and their interactions with each other.

Trade: The trade is just what it sounds like the exchange goods and resources between people or between geographic areas. So Japon sells cars to the US and the US sell financial services to Japon that's trade when economist talk about markets.

Microeconomics: Concerns itself with economic decision-making on a small scale it focuses on consumer's workers.

Macroeconomics: Concerns itself with economics aggrefates which are measures of how the economy overall is doing.