The Economizing Problem

Human economic wants are unlimited Resources are scarce All economics depends directly on these two facts/assumptions Economics is about doing the best with what we have
its about using resources in the most efficient manner possible to create the most stuff to fulfill wants

Resources Factors of Production

Types of resources:
Land
All natural resources (gifts of nature) Minerals, forests, arable land, oil, etc.

Income from Land = Rent

Capital: human/physical
machinery, factories, storage facilities, transportation

Income from capital = Interest

Labor
All physical and mental talents of individuals

Income from Labor = Wages

Entrepreneurship
Initiative, Management, Innovation, Risk-taking

Income from Entrepreneurship = Profit/Loss

Economic Systems
An economic system is a particular set of institutional arrangements and mechanisms that respond to the economizing problem The market system -- capitalism The command system -- communism

The two economic sectors

Households - Consumers individuals in their private lives acting as consumers and producers Business Firms - Producers firms seeking to maximize their profit by purchasing productive resources

The Market Economy and the Circular Flow Model

Virtually all major economies work through some version of the market economic system In this system, there are a number of different aspects to the market
a market to buy and sell resources a market to buy and sell products businesses households

Building the Circular Flow Model - Step 1

RESOURCE FACTOR MARKET

BUSINESSES

HOUSEHOLDS

PRODUCT MARKET

Building the Circular Flow Model - Step 2

RESOURCE FACTOR MARKET

RESOURCES

INPUTS

BUSINESSES

HOUSEHOLDS

PRODUCT MARKET

Building the Circular Flow Model - Step 3

COSTS
RESOURCE MARKET

INCOMES

RESOURCES

INPUTS

BUSINESSES

HOUSEHOLDS

GOODS & SERVICES

PRODUCT MARKET

GOODS & SERVICES

Building the Circular Flow Model - Step 4

COSTS
RESOURCE MARKET

INCOMES

RESOURCES

INPUTS

BUSINESSES

HOUSEHOLDS

GOODS & SERVICES

PRODUCT MARKET

GOODS & SERVICES

Building the Circular Flow Model - Step 5

COSTS
RESOURCE MARKET

INCOMES

RESOURCES

INPUTS

BUSINESSES

HOUSEHOLDS

GOODS & SERVICES

PRODUCT MARKET

GOODS & SERVICES

REVENUE Profit from goods and services

PAYMENT Goods+Services

Factor Market
Money for wages, rent, profit, interest

Capital, land, labor, entrepreneurship

BUSINESSES

HOUSEHOLDS

Goods and Services

Money PAYMENT for Goods +Services

Product Market

How can An Economy become more productive???

Specialization Takes place when people, businesses, regions, and even countries concentrate on goods and services that they can produce better than anyone else

Division of Labor

the breaking down of a job into separate, smaller, tasks, which are performed by different workers.

Assembly Line -A manufacturing process in which interchangeable parts are added to a product to create an end product

Technological Advances Robotics: machines perform physical tasks Invention: new goods and services Innovation: Improving a good or service Automation: machines control production

Labor/Workers
-Blue-collar workers: working class employee who perform manual/unskilled labor Ex: factory worker -White-collar workers: perform tasks that require less physical labor. Skilled workers oftentimes are more highly paid than blue-collar workers. Ex: doctors, lawyers, administrators -Pink-collar workers: workers who work in the charitable sector Ex: Susan G. Koman -Green-collar workers: workers who work in the environmental sector Ex:

Economic decision making requires people to consider all the costs and benefits of a decision

Fixed Costs -Costs or expenses that are the same no matter how many units of a good are produced Ex: mortgage payments, rent Salary [ie the manager]

Variable Costs
-Costs or expenses that change with the number of products produced Ex: wages, raw materials, electricity bills, water bills -These costs increase when production increases and decrease when production decreases

Total Costs

-Fixed Costs + Variable costs= Total costs

Key Terms and Concepts

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 Command system Resource market Product market Circular flow model