The Economizing ProblemHuman economic wants are
unlimited Resources are scarceAll economics depends directly on
these two facts/assumptionsEconomics is about doing the best
with what we have it’s about using resources in the most
efficient manner possible to create the most “stuff” to fulfill wants
Resources – Factors of Production Types of resources:
Land All natural resources (“gifts of nature”) Minerals, forests,
arable land, oil, etc.Income from Land = Rent
Capital: human/physical machinery, factories, storage facilities, transportationIncome from capital = Interest
Labor All physical and mental talents of individualsIncome from Labor = Wages
Entrepreneurship Initiative, Management, Innovation, Risk-takingIncome from Entrepreneurship =
Profit/Loss
Economic SystemsAn economic system is a particular
set of institutional arrangements and mechanisms that respond to the economizing problem
The market system -- “capitalism”The command system --
“communism”
The two economic sectorsHouseholds - Consumers
individuals in their private lives acting as consumers and producers
Business – Firms - Producersfirms seeking to maximize their profit by purchasing productive resources
The Market Economy and the Circular Flow Model
Virtually all major economies work through some version of the market economic system
In this system, there are a number of different aspects to the market a market to buy and sell resources a market to buy and sell products businesses households
BUSINESSES HOUSEHOLDS
RESOURCEFACTORMARKET
PRODUCTMARKET
Building the Circular Flow Model - Step 1
BUSINESSES HOUSEHOLDS
RESOURCEFACTORMARKET
RESOURCES INPUTS
PRODUCTMARKET
Building the Circular Flow Model - Step 2
BUSINESSES HOUSEHOLDS
RESOURCEMARKET
RESOURCES INPUTS
COSTS INCOMES
GOODS &SERVICES
GOODS &SERVICES
PRODUCTMARKET
Building the Circular Flow Model - Step 3
BUSINESSES HOUSEHOLDS
RESOURCEMARKET
RESOURCES INPUTS
COSTS INCOMES
PRODUCTMARKET
GOODS &SERVICES
GOODS &SERVICES
Building the Circular Flow Model - Step 4
BUSINESSES HOUSEHOLDS
RESOURCEMARKET
RESOURCES INPUTS
COSTS INCOMES
PRODUCTMARKET
GOODS &SERVICES
GOODS &SERVICES
PAYMENT Goods+Services
REVENUEProfit from goods and services
Building the Circular Flow Model - Step 5
Factor Market
BUSINESSES HOUSEHOLDS
Money for wages, rent, profit, interest
Product Market
Goods and Services
Money PAYMENT for Goods +Services
Capital, land, labor, entrepreneurship
How can An Economy become more productive???
SpecializationTakes place when people,
businesses, regions, and even countries concentrate on goods and services that they can produce better than anyone else
Division of Labor
the breaking down of a job into separate, smaller, tasks, which are performed by different workers.
Assembly Line-A manufacturing process in which interchangeable parts are added to a product to create an end product
Technological AdvancesRobotics: machines perform physical
tasksInvention: new goods and servicesInnovation: Improving a good or
serviceAutomation: machines control
production
Labor/Workers -Blue-collar workers: working class employee who
perform manual/unskilled labor Ex: factory worker -White-collar workers: perform tasks that require
less physical labor. Skilled workers oftentimes are more highly paid than blue-collar workers. Ex: doctors, lawyers, administrators
-Pink-collar workers: workers who work in the charitable sector Ex: Susan G. Koman
-Green-collar workers: workers who work in the environmental sector Ex:
Economic decision making requires people to consider all
the costs and benefits of a decision Fixed Costs-Costs or expenses that are the same
no matter how many units of a good are produced
Ex: mortgage payments, rent Salary [ie the manager]
Variable Costs
-Costs or expenses that change with the number of products produced
Ex: wages, raw materials, electricity bills, water bills
-These costs increase when production increases and decrease when production decreases
Total Costs
-Fixed Costs + Variable costs= Total costs
Key Terms and Concepts Economizing problem Utility Economic resources Land Capital Investment Labor Entrepreneurial ability Factors of production Full employment Full production Productive efficiency Allocative efficiency Consumer goods
Capital goods Production possibilities table Production possibilities curve Opportunity cost Law of increasing opportunity costs Economic growth Economic system Market system Command system Resource market Product market Circular flow model