CircularFlow-EconomicSystems

7/29/2019 CircularFlow-EconomicSystems

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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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RESOURCE

FACTOR

MARKET

RESOURCES INPUTS

PRODUCT

MARKET



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RESOURCE

MARKET

RESOURCES INPUTS

COSTS INCOMES

GOODS &SERVICES

GOODS &SERVICES

PRODUCT

MARKET



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RESOURCE

MARKET

RESOURCES INPUTS

COSTS INCOMES

PRODUCT

MARKET

GOODS &SERVICES

GOODS &SERVICES



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RESOURCE

MARKET

RESOURCES INPUTS

COSTS INCOMES

PRODUCT

MARKET

GOODS &SERVICES

GOODS &SERVICES

PAYMENTGoods+Services

REVENUE

Profit from goodsand services



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Factor Market


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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CircularFlow-EconomicSystems