1. Circular Flow Diagram

2. 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

3. 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

4. Consumers
(Households)
Producers
(Businesses)

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

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

7. (land, labor, capital, entrepreneurs)
Factors of Production
Consumers
(Households)
Factor Market
(resource market)
(land, labor, capital, entrepreneurs)
Product Market
(goods/services)
Producers
(Businesses)

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

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

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

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

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

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

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

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

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

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

19. Production Possibilities Frontiers (Review for Bench Mark)

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

21. Production Possibilities Frontier
(PPF/PPC)
Scarcity – unlimited wants, limited resources
Consumer Goods (Pizza)
100
Capital Goods (Robots) 50

22. Production Possibilities Frontier
(PPF/PPC)
Scarcity – unlimited wants, limited resources
Consumer Goods (Pizza)
100
Capital Goods (Robots) 50

23. Production Possibilities Frontier
(PPF/PPC)
Scarcity – unlimited wants, limited resources
Opportunity costs and trade-offs
Consumer Goods (Pizza)
100 a b .
Capital Goods (Robots) 50

24. Production Possibilities Frontier
(PPF/PPC)
Scarcity – unlimited wants, limited resources
Opportunity costs and trade-offs
Consumer Goods (Pizza)
100 a 90 b . 50
Capital Goods (Robots) 25 45 50

25. Production Possibilities Frontier
(PPF/PPC)
Scarcity – unlimited wants, limited resources
Opportunity costs and trade-offs
Consumer Goods (Pizza)
100 a 90
Cost = 40 pizzas b . 50
Benefit = 20 robots
Capital Goods (Robots) 25 45 50

26. Production Possibilities Frontier
(PPF/PPC)
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)
Consumer Goods (Pizza)
100 a 90
Cost = 40 pizzas b . 50
Benefit = 20 robots
Capital Goods (Robots) 25 45 50

27. Production Possibilities Frontier
(PPF/PPC)
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)
Consumer Goods (Pizza)
100 a 90
Cost = 40 pizzas c b . 50
Inefficient – unemployed resources
Benefit = 20 robots
Capital Goods (Robots) 25 45 50

28. Production Possibilities Frontier
(PPF/PPC)
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)
Consumer Goods (Pizza)
100 a 90
Cost = 40 pizzas
policy c b . 50
Inefficient – unemployed resources
Benefit = 20 robots
Capital Goods (Robots) 25 45 50

29. Production Possibilities Frontier
(PPF/PPC)
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)
Consumer Goods (Pizza)
100 a d 90
Cost = 40 pizzas
policy c b . 50
Inefficient – unemployed resources
Benefit = 20 robots
Capital Goods (Robots) 25 45 50

30. Production Possibilities Frontier
(PPF/PPC)
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)
Consumer Goods (Pizza)
100 a d
Unattainable with current resources and technology 90
Cost = 40 pizzas
policy c b . 50
Inefficient – unemployed resources
Benefit = 20 robots
Capital Goods (Robots) 25 45 50

31. Production Possibilities Frontier
(PPF/PPC)
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)
Consumer Goods (Pizza)
100 a d
Unattainable with current resources and technology 90
Cost = 40 pizzas
policy c b . 50
Inefficient – unemployed resources
Benefit = 20 robots
Capital Goods (Robots) 25 45 50

32. Production Possibilities Frontier
(PPF/PPC)
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)
Consumer Goods (Pizza)
100 a d
Unattainable with current resources and technology 90
Cost = 40 pizzas
policy c b . 50
Inefficient – unemployed resources
Economic Growth
Benefit = 20 robots
Capital Goods (Robots) 25 45 50
Economic Growth = SOL
Increased quality of human resources (EDUCATION) or technology (INVESTMENT)

33. Production Possibilities Frontier
(PPF/PPC)
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)
Consumer Goods (Pizza)
100
Developing nation a d
Unattainable with current resources and technology 90
Cost = 40 pizzas
policy c b
U.S. 50
Inefficient – unemployed resources
Economic Growth
Benefit = 20 robots
Capital Goods (Robots) 25 45 50
Economic Growth = SOL
Increased quality of human resources (EDUCATION) or technology (INVESTMENT)

34. Production Possibilities Frontier
(PPF/PPC)
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)
Consumer Goods (Pizza)
NOW
100
Developing nation a d
Unattainable with current resources and technology 90
Cost = 40 pizzas
policy c b
U.S. 50
Inefficient – unemployed resources
Economic Growth
Benefit = 20 robots
Capital Goods (Robots) 25 45 50
Economic Growth = SOL
Increased quality of human resources (EDUCATION) or technology (INVESTMENT)
FUTURE

35. Production Possibilities Frontier
(PPF/PPC)
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)
Consumer Goods (Pizza)
NOW
Economic Interdependence
100
Developing nation a d
Unattainable with current resources and technology 90
Cost = 40 pizzas
policy c b
U.S. 50
Inefficient – unemployed resources
Economic Growth
Benefit = 20 robots
Capital Goods (Robots) 25 45 50
Economic Growth = SOL
Increased quality of human resources (EDUCATION) or technology (INVESTMENT)
FUTURE

36. Production Possibilities Frontier
(PPF/PPC)
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)
Consumer Goods (Pizza)
NOW
Economic Interdependence
100
Developing nation a d
Unattainable with current resources and technology 90
Cost = 40 pizzas
policy c b
U.S. 50
Inefficient – unemployed resources
Economic Growth
Benefit = 20 robots
Capital Goods (Robots) 25 45 50
Economic Growth = SOL
Increased quality of human resources (EDUCATION) or technology (INVESTMENT)
Investment = purchase of capital goods
FUTURE

39. The End