Chapter 1 Econ. I’m taking a course that has the Econ. I’m taking a course that has the hhighestighest failure rate at college. failure rate at college.
Uncle Sam wants you toUncle Sam wants you todo better in economics.do better in economics.
What is Economics?What is Economics?
Economizing ProblemEconomizing Problem
Dealing with ““ScarcityScarcity””
TThe he HHot ot MMajor ajor FFor or UUndergrads ndergrads IIss EEconomicsconomics WSJ – 2005WSJ – 2005
• Universities awarded 16,141 economics16,141 economics degrees last year at 272 colleges & universities which is up 40% in five yearsup 40% in five years.
• There has been a clear explosion of economics as a majorclear explosion of economics as a major, particularly at the top colleges.
• At New York UniversityNew York University, the econ major has doubled in econ major has doubled in 10 years10 years. At 800800, it is now the most popular major. Economics is also the number one major number one major atat Harvard (964 Harvard (964 studentsstudents)),, Columbia (up 67Columbia (up 67%% in in 5 5 yryr..)), StanfordStanford, PennPenn, PrincetonPrinceton, Chicago (24% of graduating class)Chicago (24% of graduating class), and 2nd at BrownBrown, YaleYale, and University of California at BerkeleyUniversity of California at Berkeley.
• The increase in the numbers is the result of many students seeing students seeing economics as the best vehicle promising good pay and securityeconomics as the best vehicle promising good pay and security.
• Students realize that understanding economics has become a fundamental fundamental necessity of lifenecessity of life. Economics rising popularity is even globalglobal. Econ majors in Poland have doubledPoland have doubled in 6 years. In RussiaRussia, econ majors have jumped from 18% of students to 31%31%. Also, the chairman of the economics department at London School of EconomicsLondon School of Economics says econ’s popularity is at an all time highall time high.
““Econ, EconEcon, Econ,,I want to majorI want to majorin Econ.”in Econ.”
MICROECONOMICSMICROECONOMICS......
““Beautiful Beautiful forest!.forest!.
““Beautiful Beautiful leaf!”leaf!”
MACROECONOMICSMACROECONOMICS......
1.1. MacroMacro [national] economics – concerned with the economy as a wholeeconomy as a whole Macro
examines the “forest, not the trees, “forest, not the trees, leaves, or specific pieces of bark.”leaves, or specific pieces of bark.”
.2. MicroMicro [details of the big picture] – concerned with specific specific economic unitseconomic units or individual markets under a microscope. Emphasis is on individual households, industries, or firms [like the # of workers employed by Ford] [Concerns the components of the economy] Micro examines the “trees, leaves, & pieces of bark, “trees, leaves, & pieces of bark, rather than the forest.”rather than the forest.”
Great Forest!Great Forest!
Nice bark!Nice bark!
.
ProductionProductionMicroeconomicsMicroeconomics MacroeconomicsMacroeconomicsHow much steelHow much steel Total industrial outputTotal industrial outputHow much office spaceHow much office space Gross Domestic PGross Domestic Productroduct
PricesPricesPrice of individual goodsPrice of individual goods Price of medical carePrice of medical care
Rate of inflationRate of inflation EmploymentEmployment
Jobs in the steel industryJobs in the steel industry Total number of jobsTotal number of jobsEconomy’s unemploymentEconomy’s unemployment
““Check out those Check out those pieces of bark!.pieces of bark!.
““Beautiful, Beautiful, beautiful beautiful forest!”forest!”
MacroMacro[large](telescope) “whole economy” [economy-wide issues]
MicroMicro[small](microscope] “segment of the economy” [issues in the economy]
IIs the s the ffollowing ollowing MicroMicro oror MacroMacro??
1. The price1. The price of of digital cameras increased 5%digital cameras increased 5% last last year.year. 2. Unemployment was 5.4% for the U.S. workforce.2. Unemployment was 5.4% for the U.S. workforce.3. Unemployment in the auto industry was 8% last year.3. Unemployment in the auto industry was 8% last year.4. Duck N4. Duck National ational Bank lowered its interest rates on CDs to 8%.Bank lowered its interest rates on CDs to 8%.5. The Inflation rate rose to 2.7% last year.5. The Inflation rate rose to 2.7% last year.6. The computer industry laid off 8% of its workers last year.6. The computer industry laid off 8% of its workers last year.7. The price of gasoline rose 25% last year. 7. The price of gasoline rose 25% last year.
““What forest, check What forest, check these branches, these branches, limbs, and leaves.”limbs, and leaves.”
BUT LIMITED BUT LIMITED OROR SCARCE RESOURCES! SCARCE RESOURCES!
SOCIETY HAS VIRTUALLYSOCIETY HAS VIRTUALLY UNLIMITED UNLIMITED WANTSWANTS......THE FOUNDATION OF ECONOMICSTHE FOUNDATION OF ECONOMICS
ScarcityScarcity – Wants > Availability – Wants > Availability of Resourcesof Resources
ECONOMICSECONOMICS - - “Science of scarcity”“Science of scarcity”-the study of the choiceschoices people make in an effort to satisfy their unlimited needs and wantsunlimited needs and wants from limited resourceslimited resources.
EconomicsEconomics is the academic discipline most discussedmost discussed by the general public.It is also one of the least understoodleast understood. [“Language of graphs”][“Language of graphs”]
ScarcityScarcity ChoicesChoices Opportunity CostOpportunity Cost
FoodFood, , clothingclothing, , sheltershelter,,Chrysler 300, mansion, Nintendo DS,Chrysler 300, mansion, Nintendo DS,
jewelry, iPod, projector, digital camera,jewelry, iPod, projector, digital camera,good health, children, camcorder, laptopgood health, children, camcorder, laptopwarmth, indoor plumbing, rollerblades,warmth, indoor plumbing, rollerblades,a sense of personal worth, Plasma TV,a sense of personal worth, Plasma TV,
literacy, high economics grade, cellliteracy, high economics grade, cellphone, compact discs, moneyphone, compact discs, money
““Need”Need” those first those firstthree to survive.three to survive.
Unlimited Human WantsUnlimited Human Wants Limited ResourcesLimited Resources
Scarcity ProblemScarcity Problem
LandLand,, LLabor,abor, CCapitalapital,, EEntrepreneurntrepreneurRRent,ent, WWages,ages, IInterest,nterest, PProfitsrofits
THE FOUNDATION OF ECONOMICSTHE FOUNDATION OF ECONOMICSSOCIETY HAS VIRTUALLYSOCIETY HAS VIRTUALLY UNLIMITED WANTS...UNLIMITED WANTS...
GOODS & SERVICES PROVIDE...GOODS & SERVICES PROVIDE...
UTILITYUTILITY [satisfactionsatisfaction]
LUXURIESLUXURIES
GOODS & SERVICES PROVIDE...GOODS & SERVICES PROVIDE...
UTILITY[satisfactionsatisfaction]
NECESSITIESNECESSITIES
FoodFood ClothingClothing ShelterShelter
LuxuriesLuxuries
V.V..
..
SScarcitycarcity ChoicesChoices Opportunity CostsOpportunity Costs
11stst Choice Choice (and a good one)(and a good one)
The The Opportunity CostOpportunity Cost is the is the Opportunity LostOpportunity Lost
[“what is possible for $10,000$10,000”]
Opportunity CostOpportunity Cost22ndnd Choice Choice
Trade-offsTrade-offs–decision (choicechoice) to get more of one thing means to accept less of another.
Opportunity CostOpportunity Cost – – 22ndnd Choice Choice(most important concept in economics)
[what you sacrifice when you make a choice]
Charlie O’ConnellCharlie O’Connell
Sarah BSarah B KrisilyKrisily
““I’m in love withI’m in love withboth, but can both, but can have only onehave only one.”.”
The BachelorThe Bachelor
And – As 40 Million Watched, And – As 40 Million Watched, Joe Millionaire chose Zora over SarahJoe Millionaire chose Zora over Sarah
Economic Way of ThinkingEconomic Way of ThinkingDo the Benefits outweigh the cost?Do the Benefits outweigh the cost?
Scales of EconomicsScales of Economics
Expected marginal benefits Expected marginal costsExpected marginal costs
Choices are primarily marginal – not all or nothing.Choices are primarily marginal – not all or nothing.
…are all the alternatives in making a decision
…the cost of the next best use of money, time, or resources (you’re 2nd Choice)
… Are all of the alternatives that go into making a decision….
In this case let’s say you have many different choices of what you want to do on Saturday night.
Here are all of your Choices on Saturday night…which are…
• Go on a Date• Hang out with friends• Watch TV• Read a good book• Hang out with parents• Go to bed early
Opportunity Cost is different, though…
These are all of your trade-offs
• Remember… Opportunity Cost is the next highest valued alternative. (The 2nd Best Choice)
As you recall, these are the choices on Saturday night
• Go on a Date• Hang out with friends• Watch TV• Read a good book• Hang out with parents• Go to bed early
You choose the one that will give the most satisfaction for the price that has to be paid
The ranking’s are…• Go on a Date• Hang out with his friends• Watch TV• Read a good book• Hang out with parents• Go to bed early
1
2
3
4
5
6
Obviously you do not go through this much thought when making a decision…
What is the opportunity cost of going on the date?
Look again at the definition of Opportunity Cost
…… the cost of the next best use of money, time, or resources
• The opportunity cost was giving up the reading of a good book, the 2nd Choice
• Also, you must consider the financial cost of the date, how else you could have spent the money.
Remembering Opportunity Cost when making a decision is the start of your new way of thinking, the Economic Way of Thinking.
RESOURCE RESOURCE PAYMENTSPAYMENTS
RENTAL INCOMERENTAL INCOME
INTEREST INCOMEINTEREST INCOME
WAGESWAGES
PROFIT & LOSSPROFIT & LOSS
LANDLAND
CAPITALCAPITALHUMAN RESOURCESHUMAN RESOURCES
LABORLABOR
ENTREPRENEURENTREPRENEUR
Property ResourcesProperty Resources
When It comes to Smoking, Don’t Let YourWhen It comes to Smoking, Don’t Let YourPeers Knock You Down To Their LevelPeers Knock You Down To Their Level
Bring Your Peers Up To Your LevelBring Your Peers Up To Your Level
““Don’t smoke,Don’t smoke,don’t Smoke.”don’t Smoke.”
Review• What is the fundamental economic
problem? • What does TANSTAAFL mean? • Every choice has a __?__. • Your next best use of time, $,
resources? • Why did the chicken cross the road? • What are the 4 Factors of
production, with examples please? • How does economics help people
make better decisions?
..
1.1. SScarcitycarcity is represented by the frontier line.
2. ChoicesChoices - represented by pts A, B. or C.
3. Opportunity CostOpportunity Cost is illustrated in terms of moving from one point to another when resources are utilized to their full potential. [must make choices]
4. EfficiencyEfficiency - producing maximum output with available resources and technology.
5. Economic growthEconomic growth
5 PPC5 PPC Concepts Concepts
And How Is And How Is Economic GrowthEconomic Growth Demonstrated Demonstrated on aon a Graph? Like This Graph? Like This
Economic GrowthEconomic Growth
A
B
C
D
ab
Cap
ital G
oods
Consumer Goods0
[Ability to produce a larger[Ability to produce a largertotal output over time]total output over time]
PRODUCTION POSSIBILITIESPRODUCTION POSSIBILITIESAssumes...EfficiencyFixed ResourcesFixed TechnologyTwo Products
for example...
A Capital GoodA Capital Good A Consumer GoodA Consumer Good
Using all of our resources, to get some pizza, we must giveup some robot arms!
for example...
What if we could only produce ...
10,000 Robot Arms10,000 Robot Arms
or400,000 Pizzas400,000 Pizzas
PRODUCTION POSSIBILITIESPRODUCTION POSSIBILITIES
PIZZAPIZZA 0 1 2 3 4(in hundred thousands)RobotsRobots 10 9 7 4 0(in thousands)
in table formin table form
PRODUCTION POSSIBILITIESPRODUCTION POSSIBILITIES
PIZZAPIZZA 0 1 2 3 4(in hundred thousands)RobotsRobots 10 9 7 4 0(in thousands)
in table formin table form
graphical form
Rob
ots
(thou
sand
s)
Pizzas (hundred thousands)
PRODUCTION POSSIBILITIESPRODUCTION POSSIBILITIES
PIZZAPIZZA 00 1 2 3 4(in hundred thousands)
RobotsRobots 1010 9 7 4 0(in thousands)
in table formin table form
graphical formR
obot
sR
obot
s(th
ousa
nds)
PizzasPizzas (hundred thousands)
PRODUCTION POSSIBILITIESPRODUCTION POSSIBILITIES
PIZZAPIZZA 0 11 2 3 4(in hundred thousands)
RobotsRobots 10 99 7 4 0(in thousands)
in table form
graphical formR
obot
sR
obot
s(th
ousa
nds)
PizzasPizzas (hundred thousands)
PRODUCTION POSSIBILITIESPRODUCTION POSSIBILITIES
PIZZAPIZZA 0 1 22 3 4(in hundred thousands)
RobotsRobots 10 9 77 4 0(in thousands)
in table form
graphical formR
obot
s(th
ousa
nds)
Pizzas (hundred thousands)
PRODUCTION POSSIBILITIESPRODUCTION POSSIBILITIES
PIZZAPIZZA 0 1 2 33 4(in hundred thousands)
RobotsRobots 10 9 7 44 0(in thousands)
in table form
graphical formR
obot
s(th
ousa
nds)
Pizzas (hundred thousands)
PRODUCTION POSSIBILITIESPRODUCTION POSSIBILITIES
PIZZAPIZZA 0 1 2 3 44(in hundred thousands)
RobotsRobots 10 9 7 4 00(in thousands)
in table form
graphical formR
obot
sR
obot
s(th
ousa
nds)
Pizzas Pizzas (hundred thousands)
PRODUCTION POSSIBILITIESPRODUCTION POSSIBILITIES
At any one point in time, a full-employment, full-production economy must sacrifice some of product to obtain more of product .
PRODUCTION POSSIBILITIESPRODUCTION POSSIBILITIESLimited Resources means a limited output...Limited Resources means a limited output...
Q
Rob
ots
Rob
ots
(thou
sand
s)
PizzasPizzas (hundred thousands)
14141313121211111010 99 88 77 66 55 44 33 22 11
1 2 3 4 5 6 7 81 2 3 4 5 6 7 8
AA BBCC
DD
EE
WW
AttainableAttainablebutbut
InefficientInefficient
UnattainableUnattainable
AAttainablettainable& & EEfficientfficient
PRODUCTION POSSIBILITIESPRODUCTION POSSIBILITIES
Q
Q
Rob
ots
(thou
sand
s)
Pizzas (hundred thousands)
1413121110 9 8 7 6 5 4 3 2 1
1 2 3 4 5 6 7 8
A BC
D
E
W
Attainablebut
Inefficient
Unattainable
Attainable& Efficient
PRODUCTION POSSIBILITIESPRODUCTION POSSIBILITIES
Notes...LAW OF INCREASINGLAW OF INCREASINGOPPORTUNITY COSTSOPPORTUNITY COSTS
Rob
ots
Rob
ots
(thou
sand
s)(th
ousa
nds)
Pizzas Pizzas (hundred thousands)(hundred thousands)
14141313121211111010 99 88 77 66 55 44 33 22 11
1 2 3 4 5 6 7 81 2 3 4 5 6 7 8
A BC
D
E
W
Attainablebut
Inefficient
UnattainableUnattainable
AttainableAttainable& Efficient& Efficient
PRODUCTION POSSIBILITIESPRODUCTION POSSIBILITIES
Notes...LAW OF INCREASINGLAW OF INCREASINGOPPORTUNITY COSTSOPPORTUNITY COSTS
Economic resources arenot completely adapt-able to other uses.
It will be a CONCAVE curveIt will be a CONCAVE curve
Q
Q
Rob
ots
Rob
ots
(thou
sand
s)
PizzasPizzas (hundred thousands)
1413121110 9 8 7 6 5 4 3 2 1
1 2 3 4 5 6 7 8
UU
UUnemployment &nemployment &UUnderemployment nderemployment Shown by Point Shown by Point UU
More of either orMore of either orboth is possibleboth is possible
PRODUCTION POSSIBILITIESPRODUCTION POSSIBILITIES
Q
Q
Rob
ots
Rob
ots
(thou
sand
s)
PizzasPizzas (hundred thousands)
1413121110 9 8 7 6 5 4 3 2 1
1 2 3 4 5 6 7 8
PRODUCTION POSSIBILITIESPRODUCTION POSSIBILITIES
Notes...Economic GrowthEconomic Growth
The ability to produce a larger total output - a rightward shift of the production possibilities curve caused by...
Q
Q
Rob
ots
Rob
ots
(thou
sand
s)
PizzasPizzas (hundred thousands)
1413121110 9 8 7 6 5 4 3 2 1
1 2 3 4 5 6 7 8
More of either orboth is possible
PRODUCTION POSSIBILITIESPRODUCTION POSSIBILITIES
Notes...Economic GrowthEconomic Growth
1. Increase in resources -
2. Better resource quality -2. Better resource quality -
3. Technological advances -3. Technological advances -
Economic Economic GrowthGrowth
Q
Q
Rob
ots
Rob
ots
(thou
sand
s)
RadiosRadios (hundred thousands)
1413121110 9 8 7 6 5 4 3 2 1
1 2 3 4 5 6 7 8
A’
B’
C’
D’
E’
PRODUCTION POSSIBILITIESPRODUCTION POSSIBILITIES
Two Examples of Economic GrowthTwo Examples of Economic Growth
FAVORING PRESENT GOODSFAVORING PRESENT GOODS
Goods for the Present
Goo
ds fo
r the
Fut
ure
Goo
ds fo
r the
Fut
ure CURRENTCURRENT
CURVECURVE
CONSUMPTIONCONSUMPTION
PRODUCTION POSSIBILITIESPRODUCTION POSSIBILITIES
Two Examples of Economic GrowthTwo Examples of Economic Growth
FAVORINGFAVORINGPRESENT GOODSPRESENT GOODS
FAVORINGFAVORINGFUTURE GOODSFUTURE GOODS
Goods for the PresentGoods for the Present
Goo
ds fo
r the
Fut
ure
Goo
ds fo
r the
Fut
ure CURRENTCURRENT
CURVECURVE
FUTUREFUTURECURVECURVE
CONSUMPTION
Goods for the PresentGoods for the Present
Goo
ds fo
r the
Fut
ure
Goo
ds fo
r the
Fut
ure
FUTUREFUTURECURVECURVE
CONSUMPTIONCONSUMPTION
CURRENTCURRENTCURVECURVE
PRODUCTION POSSIBILITIESPRODUCTION POSSIBILITIES
Going to War (U.S.)Going to War (U.S.) When the U.S. entered WWI, we had severe unemployment. We were able to step up production of consumer goods and war materials simply by getting to full production. We went from 14.6% unemployment in 1940 to 1.2% in 1944. Over 7 million people went to work that were not working in 1940.
Going to War(Russia)Going to War(Russia). Russia, on the other hand, entered WWII at full capacity. So their preparedness entailed a shifting of resources from civilian goods and a drop in their standard of living.
The U.S. position was similar as we entered the Viet Nam War at full employment.We increased both military spending and domestic spending on the “War on Poverty.” Our attempt to achieve more “guns and butter” in a FE economy was doomed. We were trying to spend beyond capacity and ended up with double digit inflation in the 1970s.
Civilian GoodsCivilian Goods
FF
CC United StatesUnited States[Beginning of WWII][Beginning of WWII]
War GoodsWar Goods
Civilian GoodsCivilian Goods
War GoodsWar GoodsDD
CC RussiaRussia[Beginning of WWII][Beginning of WWII]
40. At what letter is there unemploymentunemployment [recessionrecession]?41. What letters represent resources being used in their most productive mannermost productive manner? [full employment, full production, and best available technology]42. What letter represents an improvement in technologyimprovement in technology, therefore a new PPCnew PPC frontier line?43. The (straight line/curve) illustrates the “line of“line of increasing cost”increasing cost”??44. The (straight line/curve) illustrates the “law of constant cost.”“law of constant cost.”45. At what letter would there be the most economic growth inmost economic growth in thethe futurefuture if a country were producing there now?46. What is the opportunity costopportunity cost when moving from “C” to “D”“C” to “D”;; EE toto B B; & do we have to give anything up when moving from F to DF to D?
FF
A,B,C,D,EA,B,C,D,EGG
AACapitalCapital
ConsumerConsumer nono
AA BBCC GG
DD
EE
CCAAPPIITTAALL
GGOOOODDSS
Consumer Goods
FF
PPCPPC
PPCPPC Practice Questions Practice Questions1. An economy that is fully employingfully employing all its productive resources but allocating less to investmentless to investment than than toto consumptionconsumption will be at which of the following positions on the PPC to the right? a. A b. B c. C d. D e. E
2. Which of the following best explains the shape of the PPC for the two-commoditytwo-commodity economy shown above? a. Opportunity cost of producing another unit of each stays the same. b. Opportunity cost of producing another unit of each decreasesdecreases. c. Opportunity cost of producing another unit of each increasesincreases.
3. Which of the following is true of the PPCtrue of the PPC on the right? a. Point Q is attainable but undesirable. b. Point R is unattainable but undesirable. c. A technological improvement of watches would move the economy from T to P. d The opportunity cost of moving from S to T is the # of watches given up.
4. If we move from B to CB to C on the graph (right), the opportunity costopportunity cost is? a. AH units of good Y b. OG units of good Y c. EF units of good X d. HG units of good Y
BB
CC
AA
HH
GG
OO
PPCPPC PPracticeractice QQuestionsuestions [continued][continued]
5. Which of the following would cause the PPC shown (right) to shift outward? a. Reopening steel plants that had been closed b. Rehiring laid-off workers c. Using machinery for missile production instead of steel production d. Using machinery for steel production instead of missile production e. Developing a more efficient steelmaking process
6. Base on the graph (right), which statements are true? I. The opportunity cost of moving from P to R is 10 units of Y. II. The opportunity cost of moving from R to P is 8 units of X. III. The opportunity cost of moving from Q to R is 0 units. a. I only b. III only c. I & II only d. I, II, & III
SteelSteel
MissilesMissiles
XX
1. Land Land [natural resourcesnatural resources] – [“gifts of nature“gifts of nature”]
.
The The FourFour Factors Factors ofof Production Production
““GiftsGifts of of NatureNature””
WaterWater WindWind
SunSun Fossil fuelsFossil fuels
.
2. LaborLabor [human resourceshuman resources] anyone who works [“paid work”“paid work”]A. PhysicalPhysical – pro athletes & lumberjacksB. IntellectualIntellectual – accountants & lawyers
““Hired HelpHired Help””
.
3. CapitalCapital Resources Resources – all “man-made inputs”“man-made inputs” used to produce consumer products (machinery, physical plants, & tools)(machinery, physical plants, & tools). A. Capital goodsCapital goods – goods [machinery, buildings, & tools] used to produce other goodsproduce other goods. [crane, Ford plant, hammer]
4. EntrepreneurshipEntrepreneurship – Combines land, labor, & capital to Combines land, labor, & capital to produce productsproduce products.
Resource paymentsResource payments. The resource owners receive rentrent [for the use of their land; wageswages [for their labor]; interestinterest [payment for financial capital], and profitsprofits [for their entrepreneurial ability].
Rent Wages Interest ProfitsRent Wages Interest ProfitsLand Labor Capital EntrepreneurLand Labor Capital Entrepreneur
.
.
Real Real CapitalCapital v.v. FinancialFinancial CapitalCapital
Notes...
INVESTMENTINVESTMENT
FINANCIALFINANCIAL CAPITAL CAPITAL[stocks, bonds, & money][stocks, bonds, & money]
REALREAL CAPITAL CAPITAL[tools, machinery, & factories]
CanCan produce something produce somethingdirectly with thesedirectly with these
Can’tCan’t produce anything produce anythingdirectly with thesedirectly with these
The The Harley HogHarley Hog Circular Flow Circular Flow
Product MarketProduct Market
Resource MarketResource Market
Hog Hog CIRCULAR FLOW MODELCIRCULAR FLOW MODEL
BUSINESSESBUSINESSES HOUSEHOLDSHOUSEHOLDS
PRODUCT MARKETPRODUCT MARKET
Mechanic
RESOURCE MARKETRESOURCE MARKET11
22
33
44
Flow 4. Goods/servicesFlow 4. Goods/servicesFlow 3: CFlow 3: Consumer expendituresonsumer expenditures
HogHog CIRCULAR FLOW CIRCULAR FLOW MODELMODEL
BUSINESSESBUSINESSES HOUSEHOLDSHOUSEHOLDS
PRODUCT MARKETPRODUCT MARKET
Mechanic
RESOURCE MARKETRESOURCE MARKET11
22
33
44
Flow 4. Goods/servicesFlow 4. Goods/servicesFlow 3: CFlow 3: Consumer expendituresonsumer expendituresFlow 1: Flow 1: LLand,and, L Labor, abor, CCapital, apital, EEntrepreneurntrepreneur
Flow 2: Flow 2: RRent, Wages, Interest, Profitsent, Wages, Interest, Profits
CIRCULAR FLOW CIRCULAR FLOW MODELMODEL
BUSINESSESBUSINESSES HOUSEHOLDSHOUSEHOLDS
PRODUCT MARKETPRODUCT MARKET
Householders demand hogs & will pay
Mechanic
RESOURCE MARKETRESOURCE MARKET
Businesses supply hogs g/sI demand that hog & will pay.
BUSINESSES HOUSEHOLDS
RESOURCEMARKET
PRODUCTPRODUCTMARKETMARKET
GOODS &GOODS &SERVICESSERVICES
GOODS &GOODS &SERVICESSERVICES
$CONSUMPTIONCONSUMPTION$ REVENUREVENUE
Resource Market
Mechanic
Businesses Show me the money!Show me the money!& you’ll get this hog.& you’ll get this hog.
CIRCULAR FLOW MODELCIRCULAR FLOW MODEL
Householders
BUSINESSES HOUSEHOLDS
RESOURCEMARKET
PRODUCTPRODUCTMARKETMARKET
GOODS &GOODS &SERVICESSERVICES
GOODS &GOODS &SERVICESSERVICES
$CONSUMPTIONCONSUMPTION$ REVENUREVENUE
Resource Market
Mechanic
HouseholdersBusinesses
I demanded this hog and had to pay for it.
Show me the money!Show me the money!& you’ll get this hog.& you’ll get this hog.
CIRCULAR FLOW MODELCIRCULAR FLOW MODEL
BUSINESSES HOUSEHOLDS
RESOURCEMARKET
PRODUCTPRODUCTMARKETMARKET
GOODS &GOODS &SERVICESSERVICES
GOODS &GOODS &SERVICESSERVICES
$CONSUMPTIONCONSUMPTION$ REVENUREVENUE
Resource Market
Mechanic
Householders
HH HH supply hog laborsupply hog labor
H.D. demands hog labor & will pay
Businesses Show me the money!Show me the money!& you’ll get this hog.& you’ll get this hog.
I demanded this hog and had to pay for it.
CIRCULAR FLOW MODELCIRCULAR FLOW MODEL
HOUSEHOLDSHOUSEHOLDS
$ COSTSCOSTS $ INCOMESINCOMES
GOODS &GOODS &SERVICESSERVICES
GOODS &GOODS &SERVICESSERVICESPRODUCT MARKETPRODUCT MARKET
ResourceResource Market Market
BUSINESSESBUSINESSES Give me Give me your your hog labor hog labor & & I’ll I’ll show you the money.show you the money.
CIRCULAR FLOW MODELCIRCULAR FLOW MODEL
HOUSEHOLDSHOUSEHOLDS
$ COSTSCOSTS $ INCOMESINCOMES
GOODS &GOODS &SERVICESSERVICES
GOODS &GOODS &SERVICESSERVICESPRODUCT MARKETPRODUCT MARKET
ResourceResource Market Market
BUSINESSESBUSINESSES
CIRCULAR FLOW MODELCIRCULAR FLOW MODEL
I supplied hog labor & was paid..
BUSINESSESBUSINESSES HOUSEHOLDSHOUSEHOLDS
RESOURCEMARKET
RESOURCESRESOURCES INPUTSINPUTS
$ COSTS$ COSTS $ INCOMES$ INCOMES
PRODUCTMARKET
GOODS &GOODS &SERVICESSERVICES
GOODS &GOODS &SERVICESSERVICES
$ CONSUMPTION$ CONSUMPTION$ REVENUE$ REVENUE
CIRCULAR FLOW MODELCIRCULAR FLOW MODEL
The Circular-Flow DiagramThe Circular-Flow Diagram
BusinessesBusinesses
Product MarketProduct Market
Resource MarketResource Market
HouseholdsHouseholds
1122
33
44
LaborLabor
BusinessesBusinessesBusinesses
What flow are the following?What flow are the following?A. Consumer expenditures?A. Consumer expenditures?B. Goods and services?B. Goods and services?C. Land, labor, capital, C. Land, labor, capital, and entrepreneurs?and entrepreneurs?D. Rent, wages, interest, D. Rent, wages, interest, and profits?and profits?
221144
33
The Circular-Flow DiagramThe Circular-Flow Diagram
HouseholdsHouseholds
Product MarketProduct Market
Resource MarketResource Market
2
3
4
What flow are the following?What flow are the following?A. Goods/services?A. Goods/services?B. Consumer expenditures?B. Consumer expenditures?C. Land, labor, capital andC. Land, labor, capital and entrepreneurial ability?entrepreneurial ability?D.D. Rent, wages, interest, Rent, wages, interest, and profits?and profits? BusinessesBusinesses
1
BusinessesBusinessesBusinesses443311
22
NS 56-59NS 56-59
56. In the product marketproduct market (householders/businesses) are the demandersdemanders and (householders/businesses) are the supplierssuppliers.57. In the resource marketresource market (householders/businesses) are the demandersdemanders and (householders/businesses) are the supplierssuppliers.58. In the resource marketresource market, (householders/businesses) sell resourcessell resources to (householders/businesses).59. In the product marketproduct market, (householders/businesses) sellsell productsproducts [goods/services] to (householders/businesses).
Fuzzy WuzzyFuzzy Wuzzy
And finally – the real opportunity cost of a bad education And finally – the real opportunity cost of a bad education is that you have to drive a Communist Caris that you have to drive a Communist Car. .
Which would begin to rust while still in the show room,
Would shake when it hit 35 mph,
Would break in half going over RR tracks,
And would never be stolen even if you left thekeys in it with the motor running.
YUGOYUGOOnly way to get up a hillOnly way to get up a hill
The The YugoYugo on the inside or under the hood on the inside or under the hood
Anytime you filled the Yugo with gas, you doubled its value. Putting seats in tripled its value.]
The EndThe End