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

2 - 1

The Foundation of Economics

Factors of Production

Employment and Efficiency

Production Possibility Curves

Economic Systems

The Circular Flow Model

Production

2 - 2





Economic Systems


THE FOUNDATION OF ECONOMICS

SOCIETY HAS VIRTUALLYUNLIMITED WANTS...

2 - 3





Economic Systems


BUT SCARCE PRODUCTIVE RESOURCES!

SOCIETY HAS VIRTUALLYUNLIMITED WANTS...

THE FOUNDATION OF ECONOMICS

2 - 4





Economic Systems


GOODS & SERVICES PROVIDE...

UTILITY

2 - 5





Economic Systems


WANTS vs. NEEDS

GOODS & SERVICES PROVIDE...

UTILITY

2 - 6





Economic Systems


LAND

SCARCE RESOURCESFACTORS OF PRODUCTION

2 - 7





Economic Systems


LAND

CAPITAL


2 - 8





Economic Systems


LAND

CAPITAL


2 - 9





Economic Systems


LAND

CAPITAL

LABOR


2 - 10





Economic Systems


LAND

CAPITAL

LABOR

ENTREPRENEURS


2 - 11





Economic Systems


ENTREPRENEURS

•Make Business Decisions•Create Something New

• Company• Product• Process

•Innovator•Risk Bearer

2 - 12





Economic Systems


RESOURCE PAYMENTS

RENT

INTEREST

WAGES

PROFIT &LOSS

LAND

CAPITAL

LABOR

ENTREPRENEUR

2 - 13





Economic Systems


Resources & Scarcity

Let’s illustrate this with a challenge.

We need 4 teams. Group by seats.

2 - 14





Economic Systems


Full EmploymentFull Production•Productive Efficiency•Allocative Efficiency

ECONOMICS & EFFICIENCY

2 - 15





Economic Systems


PRODUCTION POSSIBILITIESAssumes...

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

for example...

2 - 16





Economic Systems


PRODUCTION POSSIBILITIES

for example...

PIZZA

A Consumer Good

2 - 17





Economic Systems



for example...

Robots

A Capital Good

2 - 18





Economic Systems


What if we could only produce ...

10,000 Robotsor

400,000 Pizzas


2 - 19





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...

2 - 20





Economic Systems


PIZZA 0 1 2 3 4(in hundred thousands)

ROBOTS 10 9 7 4 0(in thousands)

in table form


2 - 21





Economic Systems




in table form

graphical formR

ob

ots

(th

ou

san

ds)

Pizzas (hundred thousands)


2 - 22





Economic Systems




in table form

graphical formR

ob

ots

(th

ou

san

ds)



2 - 23





Economic Systems




in table form

graphical formR

ob

ots

(th

ou

san

ds)



2 - 24





Economic Systems




in table form

graphical formR

ob

ots

(th

ou

san

ds)



2 - 25





Economic Systems




in table form

graphical formR

ob

ots

(th

ou

san

ds)



2 - 26





Economic Systems




in table form

graphical formR

ob

ots

(th

ou

san

ds)



2 - 27





Economic Systems


Q

Q

Ro

bo

ts (t

ho

usa

nd

s)


1413121110 9 8 7 6 5 4 3 2 1

1 2 3 4 5 6 7 8

A B

C

D

E

W

Attainablebut

Inefficient

Unattainable

Attainable& Efficient


2 - 28





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

2 - 29





Economic Systems


Q

Q

Ro

bo

ts (t

ho

usa

nd

s)


1413121110 9 8 7 6 5 4 3 2 1

1 2 3 4 5 6 7 8

U

Unemployment &Underemployment Shown by Point U

More of either orboth is possible


2 - 30





Economic Systems


Q

Q

Ro

bo

ts (t

ho

usa

nd

s)


1413121110 9 8 7 6 5 4 3 2 1

1 2 3 4 5 6 7 8

U




Notes...Economic Growth

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

2 - 31





Economic Systems


Q

Q

Ro

bo

ts (t

ho

usa

nd

s)


1413121110 9 8 7 6 5 4 3 2 1

1 2 3 4 5 6 7 8

U




Notes...Economic Growth1 – More resources

2 – Better resources

3 – Technology

4 – Capital Goods

2 - 32





Economic Systems


Economic Growth

Q

Q

Ro

bo

ts (t

ho

usa

nd

s)


1413121110 9 8 7 6 5 4 3 2 1

1 2 3 4 5 6 7 8

A’

B’

C’

D’

E’


2 - 33





Economic Systems


Two Examples of Economic Growth

ALTA - FAVORSConsumer Goods

Consumer Goods

Ca

pit

al G

oo

ds

CURRENTCURVE

FUTURECURVE

CONSUMPTION


Alta

2 - 34





Economic Systems


Two Examples of Economic Growth

ALTA - FAVORSConsumer Goods

ZORN - FAVORSCapital Goods

Consumer Goods

Ca

pit

al G

oo

ds

CURRENTCURVE

FUTURECURVE

CONSUMPTION

Consumer Goods

Ca

pit

al G

oo

ds FUTURE

CURVE

CONSUMPTION

CURRENTCURVE


Alta Zorn

2 - 35





Economic Systems


Let’s work with Production Possibility Curves

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

2 - 36





Economic Systems


P

Q

Mar

gin

al B

enef

it &

Co

st

Quantity of Pizzas

$15

10

5

1 2 3


MC

MB

Allocative Efficiency: MB=MC

MB=MC

2 - 37





Economic Systems


ECONOMIC SYSTEMS

• Who owns the factors of production?

• Where are the economic decisions made?

2 - 38





Economic Systems


ECONOMIC SYSTEMS

THE MARKET SYSTEM• Pure Capitalism • Laissez-faire

2 - 39





Economic Systems


ECONOMIC SYSTEMS

THE MARKET SYSTEM• Pure Capitalism • Laissez-faire

THE COMMAND SYSTEM• Socialism• Communism

2 - 40





Economic Systems


Command System

• Soviet Union, Eastern Europe, China

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

2 - 41





Economic Systems


Market Versus Command

2 - 42





Economic Systems


ECONOMIC SYSTEMS

TRADITIONAL SYSTEM– Based on habits and/or customs

–Tribal or indigenous

2 - 43





Economic Systems


Market System

2 - 44





Economic Systems


Market System

2 - 45





Economic Systems


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

ECONOMIC GOALS

2 - 46





Economic Systems


CIRCULAR FLOW MODEL

BUSINESSES HOUSEHOLDS

RESOURCEMARKET

PRODUCTMARKET

2 - 47





Economic Systems



RESOURCEMARKET

RESOURCES INPUTS

PRODUCTMARKET

CIRCULAR FLOW MODEL

2 - 48





Economic Systems



RESOURCEMARKET

RESOURCES INPUTS

$ COSTS $ INCOMES

GOODS &SERVICES

GOODS &SERVICES

PRODUCTMARKET

CIRCULAR FLOW MODEL

2 - 49





Economic Systems



RESOURCEMARKET

RESOURCES INPUTS

$ COSTS $ INCOMES

PRODUCTMARKET

GOODS &SERVICES

GOODS &SERVICES

CIRCULAR FLOW MODEL

2 - 50





Economic Systems



RESOURCEMARKET

RESOURCES INPUTS

$ COSTS $ INCOMES

PRODUCTMARKET

GOODS &SERVICES

GOODS &SERVICES

$ CONSUMPTION$ REVENUE

CIRCULAR FLOW MODEL

2 - 51





Economic Systems


CIRCULAR FLOW MODEL


RESOURCEMARKET

RESOURCES INPUTS

$ COSTS $ INCOMES

PRODUCTMARKET

GOODS &SERVICES

GOODS &SERVICES

$ CONSUMPTION$ REVENUE

Date post:	11-Jan-2016
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2 - 1 The Foundation of Economics Factors of Production Employment and Efficiency Production...

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