2. 2 - 1 The Foundation of Economics Factors of Production Employment and Efficiency Production Possibility Curves Economic Systems The Circular Flow Model Production

3. 2 - 2 The Foundation of Economics Factors of Production Employment and Efficiency Production Possibility Curves Economic Systems The Circular Flow Model THE FOUNDATION OF ECONOMICS SOCIETY HAS VIRTUALLY UNLIMITED WANTS...

4. 2 - 3 The Foundation of Economics Factors of Production Employment and Efficiency Production Possibility Curves Economic Systems The Circular Flow Model BUT SCARCE PRODUCTIVE RESOURCES! SOCIETY HAS VIRTUALLY UNLIMITED WANTS... THE FOUNDATION OF ECONOMICS

5. 2 - 4 The Foundation of Economics Factors of Production Employment and Efficiency Production Possibility Curves Economic Systems The Circular Flow Model GOODS & SERVICES PROVIDE... UTILITY

6. 2 - 5 The Foundation of Economics Factors of Production Employment and Efficiency Production Possibility Curves Economic Systems The Circular Flow Model WANTS vs. NEEDS GOODS & SERVICES PROVIDE... UTILITY

7. 2 - 6 The Foundation of Economics Factors of Production Employment and Efficiency Production Possibility Curves Economic Systems The Circular Flow Model LAND SCARCE RESOURCES FACTORS OF PRODUCTION

8. 2 - 7 The Foundation of Economics Factors of Production Employment and Efficiency Production Possibility Curves Economic Systems The Circular Flow Model LAND CAPITAL SCARCE RESOURCES FACTORS OF PRODUCTION

9. 2 - 8 The Foundation of Economics Factors of Production Employment and Efficiency Production Possibility Curves Economic Systems The Circular Flow Model LAND CAPITAL SCARCE RESOURCES FACTORS OF PRODUCTION

10. 2 - 9 The Foundation of Economics Factors of Production Employment and Efficiency Production Possibility Curves Economic Systems The Circular Flow Model LAND CAPITAL LABOR SCARCE RESOURCES FACTORS OF PRODUCTION

11. 2 - 10 The Foundation of Economics Factors of Production Employment and Efficiency Production Possibility Curves Economic Systems The Circular Flow Model LAND CAPITAL LABOR ENTREPRENEURS SCARCE RESOURCES FACTORS OF PRODUCTION

12. 2 - 11 The Foundation of Economics Factors of Production Employment and Efficiency Production Possibility Curves Economic Systems The Circular Flow Model ENTREPRENEURS Make Business Decisions Create Something New Company Product Process Innovator Risk Bearer

13. 2 - 12 The Foundation of Economics Factors of Production Employment and Efficiency Production Possibility Curves Economic Systems The Circular Flow Model RESOURCE PAYMENTS RENT INTEREST WAGES PROFIT & LOSS LAND CAPITAL LABOR ENTREPRENEUR

14. 2 - 13 The Foundation of Economics Factors of Production Employment and Efficiency Production Possibility Curves Economic Systems The Circular Flow Model Resources & Scarcity Let’s illustrate this with a challenge. We need 4 teams. Group by seats.

15. 2 - 14 The Foundation of Economics Factors of Production Employment and Efficiency Production Possibility Curves Economic Systems The Circular Flow Model Full Employment Full Production Productive Efficiency Allocative Efficiency ECONOMICS & EFFICIENCY

16. 2 - 15 The Foundation of Economics Factors of Production Employment and Efficiency Production Possibility Curves Economic Systems The Circular Flow Model PRODUCTION POSSIBILITIES Assumes... Full Employment Productive Efficiency Fixed Resources Fixed Technology Two Goods for example...

17. 2 - 16 The Foundation of Economics Factors of Production Employment and Efficiency Production Possibility Curves Economic Systems The Circular Flow Model PRODUCTION POSSIBILITIES for example... PIZZA A Consumer Good

18. 2 - 17 The Foundation of Economics Factors of Production Employment and Efficiency Production Possibility Curves Economic Systems The Circular Flow Model PRODUCTION POSSIBILITIES for example... Robots A Capital Good

19. 2 - 18 The Foundation of Economics Factors of Production Employment and Efficiency Production Possibility Curves Economic Systems The Circular Flow Model What if we could only produce... 10,000 Robots or 400,000 Pizzas PRODUCTION POSSIBILITIES

20. 2 - 19 The Foundation of Economics Factors of Production Employment and Efficiency Production Possibility Curves Economic Systems The Circular Flow Model At any point in time, an economy must sacrifice some of product X to obtain more of product Y. PRODUCTION POSSIBILITIES Scarce resources means a limited output...

21. 2 - 20 The Foundation of Economics Factors of Production Employment and Efficiency Production Possibility Curves Economic Systems The Circular Flow Model PIZZA01234 (in hundred thousands) ROBOTS109740 (in thousands) in table form PRODUCTION POSSIBILITIES

22. 2 - 21 The Foundation of Economics Factors of Production Employment and Efficiency Production Possibility Curves Economic Systems The Circular Flow Model PIZZA01234 (in hundred thousands) ROBOTS109740 (in thousands) in table form graphical form Robots (thousands) Pizzas (hundred thousands) PRODUCTION POSSIBILITIES

23. 2 - 22 The Foundation of Economics Factors of Production Employment and Efficiency Production Possibility Curves Economic Systems The Circular Flow Model PIZZA01234 (in hundred thousands) ROBOTS109740 (in thousands) in table form graphical form Robots (thousands) Pizzas (hundred thousands) PRODUCTION POSSIBILITIES

24. 2 - 23 The Foundation of Economics Factors of Production Employment and Efficiency Production Possibility Curves Economic Systems The Circular Flow Model PIZZA01234 (in hundred thousands) ROBOTS109740 (in thousands) in table form graphical form Robots (thousands) Pizzas (hundred thousands) PRODUCTION POSSIBILITIES

25. 2 - 24 The Foundation of Economics Factors of Production Employment and Efficiency Production Possibility Curves Economic Systems The Circular Flow Model PIZZA01234 (in hundred thousands) ROBOTS109740 (in thousands) in table form graphical form Robots (thousands) Pizzas (hundred thousands) PRODUCTION POSSIBILITIES

26. 2 - 25 The Foundation of Economics Factors of Production Employment and Efficiency Production Possibility Curves Economic Systems The Circular Flow Model PIZZA01234 (in hundred thousands) ROBOTS109740 (in thousands) in table form graphical form Robots (thousands) Pizzas (hundred thousands) PRODUCTION POSSIBILITIES

27. 2 - 26 The Foundation of Economics Factors of Production Employment and Efficiency Production Possibility Curves Economic Systems The Circular Flow Model PIZZA01234 (in hundred thousands) ROBOTS109740 (in thousands) in table form graphical form Robots (thousands) Pizzas (hundred thousands) PRODUCTION POSSIBILITIES

28. 2 - 27 The Foundation of Economics Factors of Production Employment and Efficiency Production Possibility Curves Economic Systems The Circular Flow Model Q Q Robots (thousands) Pizzas (hundred thousands) 14 13 12 11 10 9 8 7 6 5 4 3 2 1 1 2 3 4 5 6 7 8 A B C D E W Attainable but Inefficient Unattainable Attainable & Efficient PRODUCTION POSSIBILITIES

29. 2 - 28 The Foundation of Economics Factors of Production Employment and Efficiency Production Possibility Curves Economic Systems The Circular Flow Model Law of Increasing Opportunity Cost Economic resources are not completely adaptable to other uses To make more of X it costs more and more of Y This makes the Production Possibility Curve: –Bowed out from the origin –Concave

30. 2 - 29 The Foundation of Economics Factors of Production Employment and Efficiency Production Possibility Curves Economic Systems The Circular Flow Model Q Q Robots (thousands) Pizzas (hundred thousands) 14 13 12 11 10 9 8 7 6 5 4 3 2 1 1 2 3 4 5 6 7 8 U Unemployment & Underemployment Shown by Point U More of either or both is possible PRODUCTION POSSIBILITIES

31. 2 - 30 The Foundation of Economics Factors of Production Employment and Efficiency Production Possibility Curves Economic Systems The Circular Flow Model Q Q Robots (thousands) Pizzas (hundred thousands) 14 13 12 11 10 9 8 7 6 5 4 3 2 1 1 2 3 4 5 6 7 8 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 caused by...

32. 2 - 31 The Foundation of Economics Factors of Production Employment and Efficiency Production Possibility Curves Economic Systems The Circular Flow Model Q Q Robots (thousands) Pizzas (hundred thousands) 14 13 12 11 10 9 8 7 6 5 4 3 2 1 1 2 3 4 5 6 7 8 U Unemployment & Underemployment Shown by Point U More of either or both is possible PRODUCTION POSSIBILITIES Notes... Economic Growth 1 – More resources 2 – Better resources 3 – Technology 4 – Capital Goods

33. 2 - 32 The Foundation of Economics Factors of Production Employment and Efficiency Production Possibility Curves Economic Systems The Circular Flow Model Economic Growth Q Q Robots (thousands) Pizzas (hundred thousands) 14 13 12 11 10 9 8 7 6 5 4 3 2 1 1 2 3 4 5 6 7 8 A’ B’ C’ D’ E’ PRODUCTION POSSIBILITIES

34. 2 - 33 The Foundation of Economics Factors of Production Employment and Efficiency Production Possibility Curves Economic Systems The Circular Flow Model Two Examples of Economic Growth ALTA - FAVORS Consumer Goods Capital Goods CURRENT CURVE FUTURE CURVE CONSUMPTION PRODUCTION POSSIBILITIES Alta

35. 2 - 34 The Foundation of Economics Factors of Production Employment and Efficiency Production Possibility Curves Economic Systems The Circular Flow Model Two Examples of Economic Growth ALTA - FAVORS Consumer Goods ZORN - FAVORS Capital Goods Consumer Goods Capital Goods CURRENT CURVE FUTURE CURVE CONSUMPTION Consumer Goods Capital Goods FUTURE CURVE CONSUMPTION CURRENT CURVE PRODUCTION POSSIBILITIES Alta Zorn

36. 2 - 35 The Foundation of Economics Factors of Production Employment and Efficiency Production Possibility Curves Economic Systems The Circular Flow Model Let’s work with Production Possibility Curves Open your packet and work on Activity 1-2.

37. 2 - 36 The Foundation of Economics Factors of Production Employment and Efficiency Production Possibility Curves Economic Systems The Circular Flow Model P Q Marginal Benefit & Cost Quantity of Pizzas $15 10 5 1 2 3 PRODUCTION POSSIBILITIES MC MB Allocative Efficiency: MB=MC MB=MC

38. 2 - 37 The Foundation of Economics Factors of Production Employment and Efficiency Production Possibility Curves Economic Systems The Circular Flow Model ECONOMIC SYSTEMS Who owns the factors of production? Where are the economic decisions made?

39. 2 - 38 The Foundation of Economics Factors of Production Employment and Efficiency Production Possibility Curves Economic Systems The Circular Flow Model ECONOMIC SYSTEMS THE MARKET SYSTEM Pure Capitalism Laissez-faire

40. 2 - 39 The Foundation of Economics Factors of Production Employment and Efficiency Production Possibility Curves Economic Systems The Circular Flow Model ECONOMIC SYSTEMS THE MARKET SYSTEM Pure Capitalism Laissez-faire THE COMMAND SYSTEM Socialism Communism

41. 2 - 40 The Foundation of Economics Factors of Production Employment and Efficiency Production Possibility Curves Economic Systems The Circular Flow Model Command System Soviet Union, Eastern Europe, China System was a failure –The coordination problem –The incentive problem

42. 2 - 41 The Foundation of Economics Factors of Production Employment and Efficiency Production Possibility Curves Economic Systems The Circular Flow Model Market Versus Command

43. 2 - 42 The Foundation of Economics Factors of Production Employment and Efficiency Production Possibility Curves Economic Systems The Circular Flow Model ECONOMIC SYSTEMS TRADITIONAL SYSTEM –Based on habits and/or customs –Tribal or indigenous

44. 2 - 43 The Foundation of Economics Factors of Production Employment and Efficiency Production Possibility Curves Economic Systems The Circular Flow Model Market System

45. 2 - 44 The Foundation of Economics Factors of Production Employment and Efficiency Production Possibility Curves Economic Systems The Circular Flow Model Market System

46. 2 - 45 The Foundation of Economics Factors of Production Employment and Efficiency Production Possibility Curves Economic Systems The Circular Flow Model Economic Growth Full Employment Economic Efficiency Price-Level Stability Economic Freedom Equitable Distribution Economic Security Balance of Trade ECONOMIC GOALS

47. 2 - 46 The Foundation of Economics Factors of Production Employment and Efficiency Production Possibility Curves Economic Systems The Circular Flow Model CIRCULAR FLOW MODEL BUSINESSES HOUSEHOLDS RESOURCE MARKET PRODUCT MARKET

48. 2 - 47 The Foundation of Economics Factors of Production Employment and Efficiency Production Possibility Curves Economic Systems The Circular Flow Model BUSINESSES HOUSEHOLDS RESOURCE MARKET RESOURCESINPUTS PRODUCT MARKET CIRCULAR FLOW MODEL

49. 2 - 48 The Foundation of Economics Factors of Production Employment and Efficiency Production Possibility Curves Economic Systems The Circular Flow Model BUSINESSES HOUSEHOLDS RESOURCE MARKET RESOURCESINPUTS $ COSTS$ INCOMES GOODS & SERVICES SERVICES PRODUCT MARKET CIRCULAR FLOW MODEL

50. 2 - 49 The Foundation of Economics Factors of Production Employment and Efficiency Production Possibility Curves Economic Systems The Circular Flow Model BUSINESSES HOUSEHOLDS RESOURCE MARKET RESOURCESINPUTS $ COSTS$ INCOMES PRODUCT MARKET GOODS & SERVICES GOODS & SERVICES CIRCULAR FLOW MODEL

51. 2 - 50 The Foundation of Economics Factors of Production Employment and Efficiency Production Possibility Curves Economic Systems The Circular Flow Model BUSINESSES HOUSEHOLDS RESOURCE MARKET RESOURCESINPUTS $ COSTS$ INCOMES PRODUCT MARKET GOODS & SERVICES GOODS & SERVICES $ CONSUMPTION$ REVENUE CIRCULAR FLOW MODEL

52. 2 - 51 The Foundation of Economics Factors of Production Employment and Efficiency Production Possibility Curves Economic Systems The Circular Flow Model CIRCULAR FLOW MODEL BUSINESSES HOUSEHOLDS RESOURCE MARKET RESOURCESINPUTS $ COSTS$ INCOMES PRODUCT MARKET GOODS & SERVICES GOODS & SERVICES $ CONSUMPTION$ REVENUE