Economics- Using Economic Models Chapter 1, Lesson 3

Economic Growth Economic growth occurs when a nation’s total output of goods and services increases over time. Economic growth is important for two reasons. First, because of scarcity. Everyone wants more. Second, growing population. More people= less to go around.

Economic Growth Requires Risk & Sacrifice Investing in new resources can increase future productivity and consumption. But may require us to limit our current consumption. This is the dilemma of opportunity costs that everyone faces. Not consuming today in order to have the ability to consume tomorrow is not without risk. For example, are businesses making the right investment decisions today to meet consumer demands in the future? Have you picked the right major in college, or will the field you are studying no longer be necessary by the time you graduate?

Increases in Productivity Everyone in a society benefits when scarce resources are used efficiently. This is described by the term productivity a measure of the amount of goods and services produced with a given amount of resources in a specific period of time. Productivity goes up whenever more can be produced with the same amount of resources. Economic Productivity- The measure of output per measure of input. For example, if a worker produces in an hour an output of 2 units, whose price is 10$ each, then his productivity is 20$

Human Capital A major contribution to productivity comes from investments in human capital the sum of people’s skills, abilities, health, knowledge, and motivation. Individuals can invest in their own education by completing high school, going to technical school, or attending college. Businesses can invest in training and other programs that improve the skills of their workers. Government can invest in human capital by providing financial aid for education and health care costs.

Bell Ringer- Opportunity Costs On a sheet of scratch paper, fill out the graph by listing 2 items you recently purchased. List the tradeoff and the opportunity cost to each decision.

Division of Labor and Specialization Division of labor is a way of organizing work so that each worker or work group completes a separate part of the overall task. A worker who performs a few tasks many times a day is likely to be more proficient than a worker who performs several different tasks in the same period. The division of labor leads to specialization Specialization takes place when factors of production perform only tasks they can do better or more efficiently than others.

Economic Independence In the United States, increases in productivity due to the division of labor and specialization have led to… Economic interdependence. Means individuals depend on others to produce all or most of the goods they need to sustain their lives. As a result, events in one part of the world often have a dramatic impact elsewhere. Makes the world a safer place?

Circular Flow The circular flow diagram, an illustration used to show how markets connect people and businesses in the economy. The key feature of this circular flow is the market, a location or other mechanism That allows buyers and sellers to exchange a specific product. Markets may be local, national, or global—and they can even exist in cyberspace. Financial markets provide the “lubrication” in the economic engine of capitalism the much the same way as oil lubricates a cars engine.

Factor Markets Individuals earn their incomes in factor markets, where all of the factors of production are bought and sold. This is where entrepreneurs hire labor for wages and salaries, acquire land in return for rent, and borrow money to operate their businesses. The concept of a factor market is a simplified but realistic version of the real world. For example, you participate in the factor market when you sell your labor to an employer in exchange for the wages the employer pays you.

Product Market After individuals receive their income from the resources they sell in a factor market, they spend it in product markets. These are markets where producers sell their goods and services. Businesses then use this money to produce more goods and services, and the cycle of economic activity repeats itself. Markets flow in a circular pattern. Important to remember we’re all connected by markets.

Economic Models Economists use economic models to study and develop new ways to help people make better economic decisions. Economic Model are simple graphs, formulas or charts that help explain how things work. These models are based on assumptions and are only as good as the assumptions they are based upon.

Cost-benefit Analysis A way of comparing the benefits of an action to the expected costs. Cost-benefit analysis can be used to evaluate a single course of action or to make a choice between two alternatives.

Standard of Living All of these topics have a bearing on our standard of living —our quality of life based on the ownership of the necessities and luxuries that make life easier. As you study economics, you will learn how to measure the value of our production and how productivity helps determine our standard of living.