Circular Flow Diagram

Key terms to understand Products: Items consumers (who live in households) purchase Examples of products: –GOODS: clothes, shoes, gas, food, telephones, computers, televisions, –SERVICES: entertainment, legal services, cleaning services, accounting services Products are sold in a product market

Factors of Production (resources) Land: All natural resources –Soil, oil, coal, livestock, fish, trees *Money paid for land is RENT Labor: All work, physical and mental *Money paid for labor is WAGES Capital: Goods used to produce products –Truck, hammer, saw, oil rig *Money paid for capital is INTEREST (often borrowed) Entrepreneurship: The organization of a business, using land, labor, and capital *Money paid for entrepreneurship is PROFIT

Consumers (Households) Producers (Businesses)

Consumers (Households) Producers (Businesses) A market is anything that brings together buyers and sellers

Consumers (Households) Producers (Businesses) Product Market (goods/services)

Consumers (Households) Producers (Businesses) Product Market (goods/services) Factor Market (resource market) (land, labor, capital, entrepreneurs)

Consumers (Households) Producers (Businesses) Product Market (goods/services) Resource Market (land, labor, capital, entrepreneurs) Get a job!

Consumers (Households) Producers (Businesses) Product Market (goods/services) Resource Market (land, labor, capital, entrepreneurs) Get a job! Hire you!

Consumers (Households) Producers (Businesses) Product Market (goods/services) Factor Market (land, labor, capital, entrepreneurs) Get a job! Hire you! Make stuff!

Consumers (Households) Producers (Businesses) Product Market (goods/services) Factor Market (land, labor, capital, entrepreneurs) Get a job! Hire you! Make stuff! Buy stuff!

Consumers (Households) Producers (Businesses) Product Market (goods/services) Factor Market (land, labor, capital, entrepreneurs) Get a job! Hire you! Make stuff! Buy stuff! Spend $!

Consumers (Households) Producers (Businesses) Product Market (goods/services) Factor Market (land, labor, capital, entrepreneurs) Get a job! Hire you! Make stuff! Buy stuff! Spend $! Revenue $

Consumers (Households) Producers (Businesses) Product Market (goods/services) Factor Market (land, labor, capital, entrepreneurs) Get a job! Hire you! Make stuff! Buy stuff! Pay You! $ Spend $! Revenue $

Consumers (Households) Producers (Businesses) Product Market (goods/services) Factor Market (land, labor, capital, entrepreneurs) Get a job! Hire you Make stuff! Buy stuff! Pay You! $ Get Paid! $ Spend $! Revenue $

Consumers (Households) Producers (Businesses) Product Market (goods/services) Factor Market (land, labor, capital, entrepreneurs) Get a job! Hire you! Make stuff! (goods and services) Buy stuff! (goods and services) Pay You! $ wages Get Paid! $ Spend $! Revenue $ All parts of the circular flow diagram are dependent on all other parts!

Things to remember STUFF (land, labor, capital, goods, services) and MONEY (wages, rent, interest, purchasing $) flow in opposite directions

Production Possibilities Frontiers

Production Possibilities Frontier (PPF/PPC) Capital Goods (Robots) Consumer Goods (Pizza)

Production Possibilities Frontier (PPF/PPC) Capital Goods (Robots) Consumer Goods (Pizza) Scarcity – unlimited wants, limited resources

Production Possibilities Frontier (PPF/PPC) Capital Goods (Robots) Consumer Goods (Pizza) Scarcity – unlimited wants, limited resources

Production Possibilities Frontier (PPF/PPC) Capital Goods (Robots) Consumer Goods (Pizza) Scarcity – unlimited wants, limited resources Opportunity costs and trade-offs a b.

Production Possibilities Frontier (PPF/PPC) Capital Goods (Robots) Consumer Goods (Pizza) Scarcity – unlimited wants, limited resources Opportunity costs and trade-offs a b.

Production Possibilities Frontier (PPF/PPC) Capital Goods (Robots) Consumer Goods (Pizza) Scarcity – unlimited wants, limited resources Opportunity costs and trade-offs a b Cost = 40 pizzas Benefit = 20 robots.

Production Possibilities Frontier (PPF/PPC) Capital Goods (Robots) Consumer Goods (Pizza) Scarcity – unlimited wants, limited resources Opportunity costs and trade-offs Efficiency – two kinds Productive: producing at the least cost (any pt. on the PPF) Allocative: producing the goods and services most wanted by society (a particular pt. on the PPF) a b Cost = 40 pizzas Benefit = 20 robots.

Production Possibilities Frontier (PPF/PPC) Capital Goods (Robots) Consumer Goods (Pizza) Scarcity – unlimited wants, limited resources Opportunity costs and trade-offs Efficiency – two kinds Productive: producing at the least cost (any pt. on the PPF) Allocative: producing the goods and services most wanted by society (a particular pt. on the PPF) a b Cost = 40 pizzas Benefit = 20 robots c Inefficient – unemployed resources.

Production Possibilities Frontier (PPF/PPC) Capital Goods (Robots) Consumer Goods (Pizza) Scarcity – unlimited wants, limited resources Opportunity costs and trade-offs Efficiency – two kinds Productive: producing at the least cost (any pt. on the PPF) Allocative: producing the goods and services most wanted by society (a particular pt. on the PPF) a b Cost = 40 pizzas Benefit = 20 robots c policy Inefficient – unemployed resources.

Production Possibilities Frontier (PPF/PPC) Capital Goods (Robots) Consumer Goods (Pizza) Scarcity – unlimited wants, limited resources Opportunity costs and trade-offs Efficiency – two kinds Productive: producing at the least cost (any pt. on the PPF) Allocative: producing the goods and services most wanted by society (a particular pt. on the PPF) a b Cost = 40 pizzas Benefit = 20 robots c policy Inefficient – unemployed resources d.

Production Possibilities Frontier (PPF/PPC) Capital Goods (Robots) Consumer Goods (Pizza) Scarcity – unlimited wants, limited resources Opportunity costs and trade-offs Efficiency – two kinds Productive: producing at the least cost (any pt. on the PPF) Allocative: producing the goods and services most wanted by society (a particular pt. on the PPF) a b Cost = 40 pizzas Benefit = 20 robots c policy Inefficient – unemployed resources d Unattainable with current resources and technology.

Production Possibilities Frontier (PPF/PPC) Capital Goods (Robots) Consumer Goods (Pizza) Scarcity – unlimited wants, limited resources Opportunity costs and trade-offs Efficiency – two kinds Productive: producing at the least cost (any pt. on the PPF) Allocative: producing the goods and services most wanted by society (a particular pt. on the PPF) a b Cost = 40 pizzas Benefit = 20 robots c policy Inefficient – unemployed resources d Unattainable with current resources and technology.

Production Possibilities Frontier (PPF/PPC) Capital Goods (Robots) Consumer Goods (Pizza) Scarcity – unlimited wants, limited resources Opportunity costs and trade-offs Efficiency – two kinds Productive: producing at the least cost (any pt. on the PPF) Allocative: producing the goods and services most wanted by society (a particular pt. on the PPF) a b Cost = 40 pizzas Benefit = 20 robots c policy Inefficient – unemployed resources d Unattainable with current resources and technology Economic Growth. Economic Growth = SOL Increased quality of human resources (EDUCATION) or technology (INVESTMENT)

Production Possibilities Frontier (PPF/PPC) Capital Goods (Robots) Consumer Goods (Pizza) Scarcity – unlimited wants, limited resources Opportunity costs and trade-offs Efficiency – two kinds Productive: producing at the least cost (any pt. on the PPF) Allocative: producing the goods and services most wanted by society (a particular pt. on the PPF) a b Cost = 40 pizzas Benefit = 20 robots c policy Inefficient – unemployed resources d Unattainable with current resources and technology Economic Growth U.S. Developing nation Economic Growth = SOL Increased quality of human resources (EDUCATION) or technology (INVESTMENT)

Production Possibilities Frontier (PPF/PPC) Capital Goods (Robots) Consumer Goods (Pizza) Scarcity – unlimited wants, limited resources Opportunity costs and trade-offs Efficiency – two kinds Productive: producing at the least cost (any pt. on the PPF) Allocative: producing the goods and services most wanted by society (a particular pt. on the PPF) a b Cost = 40 pizzas Benefit = 20 robots c policy Inefficient – unemployed resources d Unattainable with current resources and technology Economic Growth NOW FUTURE U.S. Developing nation Economic Growth = SOL Increased quality of human resources (EDUCATION) or technology (INVESTMENT)

Production Possibilities Frontier (PPF/PPC) Capital Goods (Robots) Consumer Goods (Pizza) Scarcity – unlimited wants, limited resources Opportunity costs and trade-offs Efficiency – two kinds Productive: producing at the least cost (any pt. on the PPF) Allocative: producing the goods and services most wanted by society (a particular pt. on the PPF) a b Cost = 40 pizzas Benefit = 20 robots c policy Inefficient – unemployed resources d Unattainable with current resources and technology Economic Growth NOW FUTURE U.S. Developing nation Economic Growth = SOL Increased quality of human resources (EDUCATION) or technology (INVESTMENT) Economic Interdependence

Production Possibilities Frontier (PPF/PPC) Capital Goods (Robots) Consumer Goods (Pizza) Scarcity – unlimited wants, limited resources Opportunity costs and trade-offs Efficiency – two kinds Productive: producing at the least cost (any pt. on the PPF) Allocative: producing the goods and services most wanted by society (a particular pt. on the PPF) a b Cost = 40 pizzas Benefit = 20 robots c policy Inefficient – unemployed resources d Unattainable with current resources and technology Economic Growth NOW FUTURE U.S. Developing nation Investment = purchase of capital goods Economic Growth = SOL Increased quality of human resources (EDUCATION) or technology (INVESTMENT) Economic Interdependence

The End