2 - 1 The Foundation of Economics Factors of Production Employment and Efficiency Production...

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The Foundation of Economics

Factors of Production

Employment and Efficiency

Production Possibility Curves

Economic Systems

The Circular Flow Model

Production

Economic Systems

THE FOUNDATION OF ECONOMICS

SOCIETY HAS VIRTUALLYUNLIMITED WANTS...

Economic Systems

BUT SCARCE PRODUCTIVE RESOURCES!

SOCIETY HAS VIRTUALLYUNLIMITED WANTS...

THE FOUNDATION OF ECONOMICS

Economic Systems

GOODS & SERVICES PROVIDE...

UTILITY

Economic Systems

WANTS vs. NEEDS

GOODS & SERVICES PROVIDE...

UTILITY

Economic Systems

SCARCE RESOURCESFACTORS OF PRODUCTION

Economic Systems

CAPITAL

Economic Systems

CAPITAL

Economic Systems

CAPITAL

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Economic Systems

CAPITAL

ENTREPRENEURS

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Economic Systems

ENTREPRENEURS

•Make Business Decisions•Create Something New

• Company• Product• Process

•Innovator•Risk Bearer

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Economic Systems

RESOURCE PAYMENTS

INTEREST

PROFIT &LOSS

CAPITAL

ENTREPRENEUR

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Economic Systems

Resources & Scarcity

Let’s illustrate this with a challenge.

We need 4 teams. Group by seats.

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Economic Systems

Full EmploymentFull Production•Productive Efficiency•Allocative Efficiency

ECONOMICS & EFFICIENCY

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Economic Systems

PRODUCTION POSSIBILITIESAssumes...

•Full Employment•Productive Efficiency•Fixed Resources•Fixed Technology•Two Goods

for example...

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Economic Systems

PRODUCTION POSSIBILITIES

for example...

A Consumer Good

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Economic Systems

for example...

Robots

A Capital Good

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Economic Systems

What if we could only produce ...

10,000 Robotsor

400,000 Pizzas

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Economic Systems

At any point in time, an economy must sacrifice some of product X to obtain more of product Y.

PRODUCTION POSSIBILITIESScarce resources meansa limited output...

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Economic Systems

PIZZA 0 1 2 3 4(in hundred thousands)

ROBOTS 10 9 7 4 0(in thousands)

in table form

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Economic Systems

in table form

graphical formR

Pizzas (hundred thousands)

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Economic Systems

in table form

graphical formR

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Economic Systems

in table form

graphical formR

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Economic Systems

in table form

graphical formR

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Economic Systems

in table form

graphical formR

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Economic Systems

in table form

graphical formR

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Economic Systems

1413121110 9 8 7 6 5 4 3 2 1

1 2 3 4 5 6 7 8

Attainablebut

Inefficient

Unattainable

Attainable& Efficient

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Economic Systems

Law of IncreasingOpportunity Cost

• Economic resources are not completely adaptable to other uses

• To make more of X it costs more and more of Y

• This makes the Production Possibility Curve:– Bowed out from the origin– Concave

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Economic Systems

1413121110 9 8 7 6 5 4 3 2 1

1 2 3 4 5 6 7 8

Unemployment &Underemployment Shown by Point U

More of either orboth is possible

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Economic Systems

1413121110 9 8 7 6 5 4 3 2 1

1 2 3 4 5 6 7 8

Notes...Economic Growth

The ability to producea larger total output caused by...

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Economic Systems

1413121110 9 8 7 6 5 4 3 2 1

1 2 3 4 5 6 7 8

Notes...Economic Growth1 – More resources

2 – Better resources

3 – Technology

4 – Capital Goods

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Economic Systems

Economic Growth

1413121110 9 8 7 6 5 4 3 2 1

1 2 3 4 5 6 7 8

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Economic Systems

Two Examples of Economic Growth

ALTA - FAVORSConsumer Goods

Consumer Goods

CURRENTCURVE

FUTURECURVE

CONSUMPTION

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Economic Systems

Two Examples of Economic Growth

ALTA - FAVORSConsumer Goods

ZORN - FAVORSCapital Goods

Consumer Goods

CURRENTCURVE

FUTURECURVE

CONSUMPTION

Consumer Goods

ds FUTURE

CONSUMPTION

CURRENTCURVE

Alta Zorn

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Economic Systems

Let’s work with Production Possibility Curves

• Open your packet and work on Activity 1-2.

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Economic Systems

Quantity of Pizzas

Allocative Efficiency: MB=MC

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Economic Systems

ECONOMIC SYSTEMS

• Who owns the factors of production?

• Where are the economic decisions made?

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Economic Systems

ECONOMIC SYSTEMS

THE MARKET SYSTEM• Pure Capitalism • Laissez-faire

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Economic Systems

ECONOMIC SYSTEMS

THE MARKET SYSTEM• Pure Capitalism • Laissez-faire

THE COMMAND SYSTEM• Socialism• Communism

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Economic Systems

Command System

• Soviet Union, Eastern Europe, China

• System was a failure– The coordination problem– The incentive problem

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Economic Systems

Market Versus Command

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Economic Systems

ECONOMIC SYSTEMS

TRADITIONAL SYSTEM– Based on habits and/or customs

–Tribal or indigenous

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Economic Systems

Market System

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Economic Systems

Market System

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Economic Systems

•Economic Growth•Full Employment•Economic Efficiency•Price-Level Stability•Economic Freedom•Equitable Distribution•Economic Security•Balance of Trade

ECONOMIC GOALS

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Economic Systems

CIRCULAR FLOW MODEL

BUSINESSES HOUSEHOLDS

RESOURCEMARKET

PRODUCTMARKET

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Economic Systems

RESOURCEMARKET

RESOURCES INPUTS

PRODUCTMARKET

CIRCULAR FLOW MODEL

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Economic Systems

RESOURCEMARKET

RESOURCES INPUTS

$ COSTS $ INCOMES

GOODS &SERVICES

PRODUCTMARKET

CIRCULAR FLOW MODEL

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Economic Systems

RESOURCEMARKET

RESOURCES INPUTS

$ COSTS $ INCOMES

PRODUCTMARKET

GOODS &SERVICES

CIRCULAR FLOW MODEL

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Economic Systems

RESOURCEMARKET

RESOURCES INPUTS

$ COSTS $ INCOMES

PRODUCTMARKET

GOODS &SERVICES

$ CONSUMPTION$ REVENUE

CIRCULAR FLOW MODEL

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Economic Systems

CIRCULAR FLOW MODEL

RESOURCEMARKET

RESOURCES INPUTS

$ COSTS $ INCOMES

PRODUCTMARKET

GOODS &SERVICES

$ CONSUMPTION$ REVENUE

2 - 1 The Foundation of Economics Factors of Production Employment and Efficiency Production...

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