1. Basic Economic Concepts
Incentives and Factors of Production
Purpose: Identify how incentives influence trade-offs and the resources used for production.
Standard: Benchmark 1.1

2. Goals Define incentives and provide real world examples.
Define and provide examples of the four factors of production.

3. I. Incentives Incentives: the benefits that motivate one’s choice
*Ultimately incentives are the force that drives the market to progress*
Positive Incentives
Working hard to become successful
Using efficient strategies to save time
Negative Incentives
Not texting while driving to avoid an accident
Show up to work so you don’t get fired

4. II. Factors of Production
Labor:
all human attributes that are productive
Ex. The act of working
Land:
all natural resources
Ex. Water, dirt
Capital (Physical and Human):
productive equipment or machinery
Ex. Hammer (physical), medical school (human)
Entrepreneurship:
Innovation and risk taking
Ex. Business owners

5. III. Circular Flow Model

6. III. Circular Flow Model

7. 1.
What interactions does the circular flow model of economic activity show between consumers and producers?
Firms pay households in the market for factors of production.
Firms sell products to households in the market for goods and services.
Households buy products in the market for factors of production.
Households sell products to firms in the market for factors of production.
I only
II only
I and II only
I, II, and IV
III and IV only C

8. 2. Economists use the term “capital” to mean Money.
Plant and equipment.
Where the central government is located.
The center of the economy.
A major idea. B

9. 3. Allocative efficiency Implies optimal resource allotment.
Means no inferior products will be produced.
ensure distribution of output is equitable.
Can only occur in pure command economies.
Defies the idea of the invisible hand. A

10. 4.
In the market for resources in the circular flow diagram, households
Get goods and services from firms.
Send only labor to firms.
Send only land and labor to firms.
Send land, labor, and capital to firms.
Send spending to firms. D

11. 5.
Which of the following is true of the complete circular flow model of an open economy?
All goods and services flow through the government in exchange for resource payments.
There is no role for the foreign sector.
Households supply resources to producers in exchange for goods and services.
Producers provide goods and services to households in exchange for the costs of production.
The government collect taxes from firms and households in exchange for goods and services. E