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The Economizing Problem
Human economic wants are unlimited
Resources are scarce
All economics depends directly on thesetwo facts/assumptions
Economics is about doing the best with
what we haveits about using resources in the most
efficient manner possible to create the most
stuff to fulfill wants
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Resources Factors of Production
Types of resources:
LandAll 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 = WagesEntrepreneurship
Initiative, Management, Innovation, Risk-taking
Income from Entrepreneurship = Profit/Loss
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Economic Systems
An economic system is a particular set ofinstitutional arrangements and
mechanisms that respond to theeconomizing problem
The market system --capitalism
The command system --communism
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The two economic sectors
Households - Consumers
individuals in their private lives acting as
consumers and producersBusiness Firms - Producers
firms seeking to maximize their profit by
purchasing productive resources
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The Market Economy and the Circular
Flow Model
Virtually all major economies workthrough some version of the market
economic systemIn this system, there are a number of
different aspects to the market
a market to buy and sell resourcesa market to buy and sell products
businesses
households
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BUSINESSES HOUSEHOLDS
RESOURCE
FACTOR
MARKET
PRODUCT
MARKET
Building the Circular Flow Model - Step 1
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BUSINESSES HOUSEHOLDS
RESOURCE
FACTOR
MARKET
RESOURCES INPUTS
PRODUCT
MARKET
Building the Circular Flow Model - Step 2
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BUSINESSES HOUSEHOLDS
RESOURCE
MARKET
RESOURCES INPUTS
COSTS INCOMES
GOODS &SERVICES
GOODS &SERVICES
PRODUCT
MARKET
Building the Circular Flow Model - Step 3
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BUSINESSES HOUSEHOLDS
RESOURCE
MARKET
RESOURCES INPUTS
COSTS INCOMES
PRODUCT
MARKET
GOODS &SERVICES
GOODS &SERVICES
Building the Circular Flow Model - Step 4
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BUSINESSES HOUSEHOLDS
RESOURCE
MARKET
RESOURCES INPUTS
COSTS INCOMES
PRODUCT
MARKET
GOODS &SERVICES
GOODS &SERVICES
PAYMENTGoods+Services
REVENUE
Profit from goodsand services
Building the Circular Flow Model - Step 5
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Factor Market
BUSINESSES HOUSEHOLDS
Money for wages, rent, profit, interest
Product Market
Goods and Services
Money PAYMENT for Goods +Services
Capital, land, labor,
entrepreneurship
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How can An Economy become
more productive???
Specialization
Takes place when people, businesses,
regions, and even countries concentrateon goods and services that they canproduce better than anyone else
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Division of Labor
the breaking down of a job into separate,smaller, tasks, which are performed by
different workers.
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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
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Labor/Workers -Blue-collar workers: working class employee who
perform manual/unskilled labor
Ex: factory worker
-White-collar workers: perform tasks that require lessphysical labor. Skilled workers oftentimes are morehighly paid than blue-collar workers. Ex: doctors,lawyers, administrators
-Pink-collar workers: workers who work in the charitablesector Ex: Susan G. Koman
-Green-collar workers: workers who work in theenvironmental sector Ex:
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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 areproduced
Ex: mortgage payments, rent
Salary [ie the manager]
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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 productiondecreases
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Total Costs
-Fixed Costs + Variable costs= Total costs
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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 opportunitycosts Economic growth Economic system Market system Command system Resource market Product market Circular flow model
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