2 - 1 Copyright McGraw-Hill/Irwin, 2002 The Foundation of Economics Employment and Efficiency Unemployment, Growth, and the Future Economic Systems The Circular Flow Model Key Terms Previous Slide Next Slide End Show The Economizing Problem 2 C H A P T E R

2 - 2 Copyright McGraw-Hill/Irwin, 2002 The Foundation of Economics Employment and Efficiency Unemployment, Growth, and the Future Economic Systems The Circular Flow Model Key Terms Previous Slide Next Slide End Show THE FOUNDATION OF ECONOMICS SOCIETY HAS VIRTUALLY UNLIMITED WANTS...

2 - 3 Copyright McGraw-Hill/Irwin, 2002 The Foundation of Economics Employment and Efficiency Unemployment, Growth, and the Future Economic Systems The Circular Flow Model Key Terms Previous Slide Next Slide End Show BUT LIMITED OR SCARCE PRODUCTIVE RESOURCES! SOCIETY HAS VIRTUALLY UNLIMITED WANTS... THE FOUNDATION OF ECONOMICS

2 - 4 Copyright McGraw-Hill/Irwin, 2002 The Foundation of Economics Employment and Efficiency Unemployment, Growth, and the Future Economic Systems The Circular Flow Model Key Terms Previous Slide Next Slide End Show GOODS & SERVICES PROVIDE... UTILITY

2 - 5 Copyright McGraw-Hill/Irwin, 2002 The Foundation of Economics Employment and Efficiency Unemployment, Growth, and the Future Economic Systems The Circular Flow Model Key Terms Previous Slide Next Slide End Show LUXURIES GOODS & SERVICES PROVIDE... UTILITY

2 - 6 Copyright McGraw-Hill/Irwin, 2002 The Foundation of Economics Employment and Efficiency Unemployment, Growth, and the Future Economic Systems The Circular Flow Model Key Terms Previous Slide Next Slide End Show LUXURIES vs. NECESSITIES GOODS & SERVICES PROVIDE... UTILITY

2 - 7 Copyright McGraw-Hill/Irwin, 2002 The Foundation of Economics Employment and Efficiency Unemployment, Growth, and the Future Economic Systems The Circular Flow Model Key Terms Previous Slide Next Slide End Show PROPERTY RESOURCES LAND SCARCE RESOURCES ECONOMIC RESOURCES

2 - 8 Copyright McGraw-Hill/Irwin, 2002 The Foundation of Economics Employment and Efficiency Unemployment, Growth, and the Future Economic Systems The Circular Flow Model Key Terms Previous Slide Next Slide End Show PROPERTY RESOURCES LAND CAPITAL SCARCE RESOURCES ECONOMIC RESOURCES

2 - 9 Copyright McGraw-Hill/Irwin, 2002 The Foundation of Economics Employment and Efficiency Unemployment, Growth, and the Future Economic Systems The Circular Flow Model Key Terms Previous Slide Next Slide End Show PROPERTY RESOURCES LAND CAPITAL SCARCE RESOURCES ECONOMIC RESOURCES Notes... INVESTMENT FINANCIAL CAPITAL REAL CAPITAL

Copyright McGraw-Hill/Irwin, 2002 The Foundation of Economics Employment and Efficiency Unemployment, Growth, and the Future Economic Systems The Circular Flow Model Key Terms Previous Slide Next Slide End Show PROPERTY RESOURCES LAND CAPITAL HUMAN RESOURCES SCARCE RESOURCES ECONOMIC RESOURCES

Copyright McGraw-Hill/Irwin, 2002 The Foundation of Economics Employment and Efficiency Unemployment, Growth, and the Future Economic Systems The Circular Flow Model Key Terms Previous Slide Next Slide End Show PROPERTY RESOURCES LAND CAPITAL HUMAN RESOURCES LABOR SCARCE RESOURCES ECONOMIC RESOURCES

Copyright McGraw-Hill/Irwin, 2002 The Foundation of Economics Employment and Efficiency Unemployment, Growth, and the Future Economic Systems The Circular Flow Model Key Terms Previous Slide Next Slide End Show PROPERTY RESOURCES LAND CAPITAL HUMAN RESOURCES LABOR ENTREPRENEURIAL ABILITY SCARCE RESOURCES ECONOMIC RESOURCES A/K/A Factors Of Production

Copyright McGraw-Hill/Irwin, 2002 The Foundation of Economics Employment and Efficiency Unemployment, Growth, and the Future Economic Systems The Circular Flow Model Key Terms Previous Slide Next Slide End Show ENTREPRENEURIAL ABILITY Takes The Initiative Makes Policy Decisions Innovator The Risk Bearer

Copyright McGraw-Hill/Irwin, 2002 The Foundation of Economics Employment and Efficiency Unemployment, Growth, and the Future Economic Systems The Circular Flow Model Key Terms Previous Slide Next Slide End Show RESOURCE PAYMENTS RENTAL INCOME INTEREST INCOME WAGES PROFIT & LOSS PROPERTY RESOURCES LAND CAPITAL HUMAN RESOURCES LABOR ENTREPRENEUR

Copyright McGraw-Hill/Irwin, 2002 The Foundation of Economics Employment and Efficiency Unemployment, Growth, and the Future Economic Systems The Circular Flow Model Key Terms Previous Slide Next Slide End Show Productive Efficiency Full Employment Full Production Allocative Efficiency ECONOMICS & EFFICIENCY

Copyright McGraw-Hill/Irwin, 2002 The Foundation of Economics Employment and Efficiency Unemployment, Growth, and the Future Economic Systems The Circular Flow Model Key Terms Previous Slide Next Slide End Show PRODUCTION POSSIBILITIES Assumes... Efficiency Fixed Resources Fixed Technology Two Products for example...

Copyright McGraw-Hill/Irwin, 2002 The Foundation of Economics Employment and Efficiency Unemployment, Growth, and the Future Economic Systems The Circular Flow Model Key Terms Previous Slide Next Slide End Show PRODUCTION POSSIBILITIES Assumes... Efficiency Fixed Resources Fixed Technology Two Products for example... PIZZA A Consumer Good

Copyright McGraw-Hill/Irwin, 2002 The Foundation of Economics Employment and Efficiency Unemployment, Growth, and the Future Economic Systems The Circular Flow Model Key Terms Previous Slide Next Slide End Show PRODUCTION POSSIBILITIES Assumes... Efficiency Fixed Resources Fixed Technology Two Products for example... ROBOT ARMS A Capital Good

Copyright McGraw-Hill/Irwin, 2002 The Foundation of Economics Employment and Efficiency Unemployment, Growth, and the Future Economic Systems The Circular Flow Model Key Terms Previous Slide Next Slide End Show Using all of our resources, to get some pizza, we must give up some robot arms! for example... What if we could only produce... 10,000 Robot Arms or 400,000 Pizzas PRODUCTION POSSIBILITIES

Copyright McGraw-Hill/Irwin, 2002 The Foundation of Economics Employment and Efficiency Unemployment, Growth, and the Future Economic Systems The Circular Flow Model Key Terms Previous Slide Next Slide End Show PIZZA01234 (in hundred thousands) Robots (in thousands) in table form PRODUCTION POSSIBILITIES

Copyright McGraw-Hill/Irwin, 2002 The Foundation of Economics Employment and Efficiency Unemployment, Growth, and the Future Economic Systems The Circular Flow Model Key Terms Previous Slide Next Slide End Show PIZZA01234 (in hundred thousands) Robots (in thousands) in table form graphical form Robots (thousands) Pizzas (hundred thousands) PRODUCTION POSSIBILITIES

Copyright McGraw-Hill/Irwin, 2002 The Foundation of Economics Employment and Efficiency Unemployment, Growth, and the Future Economic Systems The Circular Flow Model Key Terms Previous Slide Next Slide End Show PIZZA01234 (in hundred thousands) Robots (in thousands) in table form graphical form Robots (thousands) Pizzas (hundred thousands) PRODUCTION POSSIBILITIES

Copyright McGraw-Hill/Irwin, 2002 The Foundation of Economics Employment and Efficiency Unemployment, Growth, and the Future Economic Systems The Circular Flow Model Key Terms Previous Slide Next Slide End Show PIZZA01234 (in hundred thousands) Robots (in thousands) in table form graphical form Robots (thousands) Pizzas (hundred thousands) PRODUCTION POSSIBILITIES

Copyright McGraw-Hill/Irwin, 2002 The Foundation of Economics Employment and Efficiency Unemployment, Growth, and the Future Economic Systems The Circular Flow Model Key Terms Previous Slide Next Slide End Show PIZZA01234 (in hundred thousands) Robots (in thousands) in table form graphical form Robots (thousands) Pizzas (hundred thousands) PRODUCTION POSSIBILITIES

Copyright McGraw-Hill/Irwin, 2002 The Foundation of Economics Employment and Efficiency Unemployment, Growth, and the Future Economic Systems The Circular Flow Model Key Terms Previous Slide Next Slide End Show PIZZA01234 (in hundred thousands) Robots (in thousands) in table form graphical form Robots (thousands) Pizzas (hundred thousands) PRODUCTION POSSIBILITIES

Copyright McGraw-Hill/Irwin, 2002 The Foundation of Economics Employment and Efficiency Unemployment, Growth, and the Future Economic Systems The Circular Flow Model Key Terms Previous Slide Next Slide End Show PIZZA01234 (in hundred thousands) Robots (in thousands) in table form graphical form Robots (thousands) Pizzas (hundred thousands) PRODUCTION POSSIBILITIES

Copyright McGraw-Hill/Irwin, 2002 The Foundation of Economics Employment and Efficiency Unemployment, Growth, and the Future Economic Systems The Circular Flow Model Key Terms Previous Slide Next Slide End Show At any point in time, a full-employment, full- production economy must sacrifice some of product X to obtain more of product Y. PRODUCTION POSSIBILITIES Limited Resources means a limited output...

Copyright McGraw-Hill/Irwin, 2002 The Foundation of Economics Employment and Efficiency Unemployment, Growth, and the Future Economic Systems The Circular Flow Model Key Terms Previous Slide Next Slide End Show Q Q Robots (thousands) Pizzas (hundred thousands) A B C D E W Attainable but Inefficient Unattainable Attainable & Efficient PRODUCTION POSSIBILITIES

Copyright McGraw-Hill/Irwin, 2002 The Foundation of Economics Employment and Efficiency Unemployment, Growth, and the Future Economic Systems The Circular Flow Model Key Terms Previous Slide Next Slide End Show Q Q Robots (thousands) Pizzas (hundred thousands) A B C D E W Attainable but Inefficient Unattainable Attainable & Efficient PRODUCTION POSSIBILITIES Notes... The amount of other products that must be forgone or sacrificed to obtain 1 unit of a specific product is called the opportunity cost of that good. LAW OF INCREASING OPPORTUNITY COSTS

Copyright McGraw-Hill/Irwin, 2002 The Foundation of Economics Employment and Efficiency Unemployment, Growth, and the Future Economic Systems The Circular Flow Model Key Terms Previous Slide Next Slide End ShowQ Q Robots (thousands) Pizzas (hundred thousands) A B C D E W Attainable but Inefficient Unattainable Attainable & Efficient PRODUCTION POSSIBILITIES Notes... LAW OF INCREASING OPPORTUNITY COSTS A graph of the production possibilities curve will be CONCAVE - bowed out from the origin. Economic resources are not completely adapt- able to other uses.

Copyright McGraw-Hill/Irwin, 2002 The Foundation of Economics Employment and Efficiency Unemployment, Growth, and the Future Economic Systems The Circular Flow Model Key Terms Previous Slide Next Slide End Show P Q Marginal Benefit & Cost Quantity of Pizzas $ PRODUCTION POSSIBILITIES MC MB Allocative Efficiency: MB=MC MB=MC

Copyright McGraw-Hill/Irwin, 2002 The Foundation of Economics Employment and Efficiency Unemployment, Growth, and the Future Economic Systems The Circular Flow Model Key Terms Previous Slide Next Slide End Show Q Q Robots (thousands) Pizzas (hundred thousands) U Unemployment & Underemployment Shown by Point U More of either or both is possible PRODUCTION POSSIBILITIES

Copyright McGraw-Hill/Irwin, 2002 The Foundation of Economics Employment and Efficiency Unemployment, Growth, and the Future Economic Systems The Circular Flow Model Key Terms Previous Slide Next Slide End Show Q Q Robots (thousands) Pizzas (hundred thousands) U Unemployment & Underemployment Shown by Point U More of either or both is possible PRODUCTION POSSIBILITIES Notes... Economic Growth The ability to produce a larger total output - a rightward shift of the production possibilities curve caused by...

Copyright McGraw-Hill/Irwin, 2002 The Foundation of Economics Employment and Efficiency Unemployment, Growth, and the Future Economic Systems The Circular Flow Model Key Terms Previous Slide Next Slide End Show Q Q Robots (thousands) Pizzas (hundred thousands) U Unemployment & Underemployment Shown by Point U More of either or both is possible PRODUCTION POSSIBILITIES Notes... Economic Growth 1 - Increases in resources Better resource quality - 3 – Technological advances

Copyright McGraw-Hill/Irwin, 2002 The Foundation of Economics Employment and Efficiency Unemployment, Growth, and the Future Economic Systems The Circular Flow Model Key Terms Previous Slide Next Slide End Show Economic Growth Q Q Robots (thousands) Pizzas (hundred thousands) A’ B’ C’ D’ E’ PRODUCTION POSSIBILITIES

Copyright McGraw-Hill/Irwin, 2002 The Foundation of Economics Employment and Efficiency Unemployment, Growth, and the Future Economic Systems The Circular Flow Model Key Terms Previous Slide Next Slide End Show Two Examples of Economic Growth FAVORING PRESENT GOODS Goods for the Present Goods for the Future CURRENT CURVE FUTURE CURVE CONSUMPTION PRODUCTION POSSIBILITIES

Copyright McGraw-Hill/Irwin, 2002 The Foundation of Economics Employment and Efficiency Unemployment, Growth, and the Future Economic Systems The Circular Flow Model Key Terms Previous Slide Next Slide End Show Two Examples of Economic Growth FAVORING PRESENT GOODS FAVORING FUTURE GOODS Goods for the Present Goods for the Future CURRENT CURVE FUTURE CURVE CONSUMPTION Goods for the Present Goods for the Future FUTURE CURVE CONSUMPTION CURRENT CURVE PRODUCTION POSSIBILITIES

Copyright McGraw-Hill/Irwin, 2002 The Foundation of Economics Employment and Efficiency Unemployment, Growth, and the Future Economic Systems The Circular Flow Model Key Terms Previous Slide Next Slide End Show Applications... Unemployment and Productive Inefficiency PRODUCTION POSSIBILITIES

Copyright McGraw-Hill/Irwin, 2002 The Foundation of Economics Employment and Efficiency Unemployment, Growth, and the Future Economic Systems The Circular Flow Model Key Terms Previous Slide Next Slide End Show Applications... Unemployment and Productive Inefficiency Tradeoffs and Opportunity Costs PRODUCTION POSSIBILITIES

Copyright McGraw-Hill/Irwin, 2002 The Foundation of Economics Employment and Efficiency Unemployment, Growth, and the Future Economic Systems The Circular Flow Model Key Terms Previous Slide Next Slide End Show Applications... Unemployment and Productive Inefficiency Tradeoffs and Opportunity Costs Shifts and the Production Possibilities Curve PRODUCTION POSSIBILITIES

Copyright McGraw-Hill/Irwin, 2002 The Foundation of Economics Employment and Efficiency Unemployment, Growth, and the Future Economic Systems The Circular Flow Model Key Terms Previous Slide Next Slide End Show ECONOMIC SYSTEMS THE MARKET SYSTEM Pure Capitalism Laissez-faire

Copyright McGraw-Hill/Irwin, 2002 The Foundation of Economics Employment and Efficiency Unemployment, Growth, and the Future Economic Systems The Circular Flow Model Key Terms Previous Slide Next Slide End Show ECONOMIC SYSTEMS THE MARKET SYSTEM Pure Capitalism Laissez-faire THE COMMAND SYSTEM Socialism Communism

Copyright McGraw-Hill/Irwin, 2002 The Foundation of Economics Employment and Efficiency Unemployment, Growth, and the Future Economic Systems The Circular Flow Model Key Terms Previous Slide Next Slide End Show CIRCULAR FLOW MODEL BUSINESSES HOUSEHOLDS RESOURCE MARKET PRODUCT MARKET

Copyright McGraw-Hill/Irwin, 2002 The Foundation of Economics Employment and Efficiency Unemployment, Growth, and the Future Economic Systems The Circular Flow Model Key Terms Previous Slide Next Slide End Show BUSINESSES HOUSEHOLDS RESOURCE MARKET RESOURCESINPUTS PRODUCT MARKET CIRCULAR FLOW MODEL

Copyright McGraw-Hill/Irwin, 2002 The Foundation of Economics Employment and Efficiency Unemployment, Growth, and the Future Economic Systems The Circular Flow Model Key Terms Previous Slide Next Slide End Show BUSINESSES HOUSEHOLDS RESOURCE MARKET RESOURCESINPUTS $ COSTS$ INCOMES GOODS & SERVICES SERVICES PRODUCT MARKET CIRCULAR FLOW MODEL

Copyright McGraw-Hill/Irwin, 2002 The Foundation of Economics Employment and Efficiency Unemployment, Growth, and the Future Economic Systems The Circular Flow Model Key Terms Previous Slide Next Slide End Show BUSINESSES HOUSEHOLDS RESOURCE MARKET RESOURCESINPUTS $ COSTS$ INCOMES PRODUCT MARKET GOODS & SERVICES GOODS & SERVICES CIRCULAR FLOW MODEL

Copyright McGraw-Hill/Irwin, 2002 The Foundation of Economics Employment and Efficiency Unemployment, Growth, and the Future Economic Systems The Circular Flow Model Key Terms Previous Slide Next Slide End Show BUSINESSES HOUSEHOLDS RESOURCE MARKET RESOURCESINPUTS $ COSTS$ INCOMES PRODUCT MARKET GOODS & SERVICES GOODS & SERVICES $ CONSUMPTION$ REVENUE CIRCULAR FLOW MODEL

Copyright McGraw-Hill/Irwin, 2002 The Foundation of Economics Employment and Efficiency Unemployment, Growth, and the Future Economic Systems The Circular Flow Model Key Terms Previous Slide Next Slide End Show CIRCULAR FLOW MODEL BUSINESSES HOUSEHOLDS RESOURCE MARKET RESOURCESINPUTS $ COSTS$ INCOMES PRODUCT MARKET GOODS & SERVICES GOODS & SERVICES $ CONSUMPTION$ REVENUE Chapter Conclusions

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 capitalism command system resource market product market circular flow model Copyright McGraw-Hill/Irwin, 2002 BACK END

Copyright McGraw-Hill/Irwin, 2002 The Foundation of Economics Employment and Efficiency Unemployment, Growth, and the Future Economic Systems The Circular Flow Model Key Terms Previous Slide Next Slide End Show INDIVIDUAL MARKETS DEMAND & SUPPLY Chapter 3 Coming Soon…