The
Foundation of
Economics
Employment
and Efficiency
Unemployment,
Growth, and
the Future
2
C HAPTE R
Economic
Systems
The Circular
Flow Model
Key Terms
Previous
Slide
Next
Slide
End
Show
2-1
Copyright McGraw-Hill/Irwin, 2005
The
Economizing
Problem
The
Foundation of
Economics
Employment
and Efficiency
Unemployment,
Growth, and
the Future
THE FOUNDATION OF
ECONOMICS
SOCIETY HAS VIRTUALLY
UNLIMITED WANTS...
Economic
Systems
The Circular
Flow Model
Key Terms
Previous
Slide
Next
Slide
End
Show
2-2
Copyright McGraw-Hill/Irwin, 2005
The
Foundation of
Economics
Employment
and Efficiency
Unemployment,
Growth, and
the Future
THE FOUNDATION OF
ECONOMICS
SOCIETY HAS VIRTUALLY
UNLIMITED WANTS...
Economic
Systems
The Circular
Flow Model
Key Terms
Previous
Slide
End
Show
2-3
Next
Slide
BUT LIMITED OR SCARCE
PRODUCTIVE RESOURCES!
Copyright McGraw-Hill/Irwin, 2005
GOODS & SERVICES PROVIDE...
The
Foundation of
Economics
Employment
and Efficiency
UTILITY
Unemployment,
Growth, and
the Future
Economic
Systems
The Circular
Flow Model
Key Terms
Previous
Slide
Next
Slide
End
Show
2-4
Copyright McGraw-Hill/Irwin, 2005
GOODS & SERVICES PROVIDE...
The
Foundation of
Economics
Employment
and Efficiency
Unemployment,
Growth, and
the Future
UTILITY
LUXURIES
Economic
Systems
The Circular
Flow Model
Key Terms
Previous
Slide
Next
Slide
End
Show
2-5
Copyright McGraw-Hill/Irwin, 2005
GOODS & SERVICES PROVIDE...
The
Foundation of
Economics
Employment
and Efficiency
Unemployment,
Growth, and
the Future
UTILITY
LUXURIES vs. NECESSITIES
Economic
Systems
The Circular
Flow Model
Key Terms
Previous
Slide
Next
Slide
End
Show
2-6
Copyright McGraw-Hill/Irwin, 2005
SCARCE RESOURCES
The
Foundation of
Economics
Employment
and Efficiency
Unemployment,
Growth, and
the Future
ECONOMIC RESOURCES
PROPERTY RESOURCES
LAND
Economic
Systems
The Circular
Flow Model
Key Terms
Previous
Slide
Next
Slide
End
Show
2-7
Copyright McGraw-Hill/Irwin, 2005
SCARCE RESOURCES
The
Foundation of
Economics
Employment
and Efficiency
ECONOMIC RESOURCES
PROPERTY RESOURCES
Unemployment,
Growth, and
the Future
LAND
Economic
Systems
CAPITAL
The Circular
Flow Model
Key Terms
Previous
Slide
Next
Slide
End
Show
2-8
Copyright McGraw-Hill/Irwin, 2005
SCARCE RESOURCES
The
Foundation of
Economics
Employment
and Efficiency
Unemployment,
Growth, and
the Future
Economic
Systems
The Circular
Flow Model
Key Terms
Previous
Slide
ECONOMIC RESOURCES
PROPERTY RESOURCES
Notes...
LAND
INVESTMENT
REAL
CAPITAL
CAPITAL
FINANCIAL
CAPITAL
Next
Slide
End
Show
2-9
Copyright McGraw-Hill/Irwin, 2005
SCARCE RESOURCES
The
Foundation of
Economics
Employment
and Efficiency
ECONOMIC RESOURCES
PROPERTY RESOURCES
Unemployment,
Growth, and
the Future
LAND
Economic
Systems
CAPITAL
The Circular
Flow Model
Key Terms
Previous
Slide
End
Show
2 - 10
HUMAN RESOURCES
Next
Slide
Copyright McGraw-Hill/Irwin, 2005
SCARCE RESOURCES
The
Foundation of
Economics
Employment
and Efficiency
ECONOMIC RESOURCES
PROPERTY RESOURCES
Unemployment,
Growth, and
the Future
LAND
Economic
Systems
CAPITAL
The Circular
Flow Model
Key Terms
Previous
Slide
End
Show
2 - 11
Next
Slide
HUMAN RESOURCES
LABOR
Copyright McGraw-Hill/Irwin, 2005
SCARCE RESOURCES
The
Foundation of
Economics
Employment
and Efficiency
ECONOMIC RESOURCES
PROPERTY RESOURCES
Unemployment,
Growth, and
the Future
LAND
Economic
Systems
CAPITAL
The Circular
Flow Model
Key Terms
Previous
Slide
End
Show
2 - 12
Next
Slide
Also known
as the
Input
Factors of
HUMAN RESOURCES
Production
LABOR
ENTREPRENEURIAL ABILITY
Copyright McGraw-Hill/Irwin, 2005
The
Foundation of
Economics
Employment
and Efficiency
Unemployment,
Growth, and
the Future
Economic
Systems
The Circular
Flow Model
Key Terms
Previous
Slide
End
Show
2 - 13
Next
Slide
ENTREPRENEURIAL
ABILITY
Takes The Initiative
Makes Strategic
Business Decisions
Innovator
The Risk Bearer
Copyright McGraw-Hill/Irwin, 2005
RESOURCE PAYMENTS
The
Foundation of
Economics
Employment
and Efficiency
Unemployment,
Growth, and
the Future
Economic
Systems
The Circular
Flow Model
PROPERTY RESOURCES
RENTAL
LAND
INCOME
INTEREST
CAPITAL
INCOME
HUMAN RESOURCES
Key Terms
LABOR
Previous
Slide
End
Show
2 - 14
Next
Slide
ENTREPRENEUR
Copyright McGraw-Hill/Irwin, 2005
WAGES
PROFIT &
LOSS
ECONOMICS & EFFICIENCY
The
Foundation of
Economics
Employment
and Efficiency
Unemployment,
Growth, and
the Future
Economic
Systems
The Circular
Flow Model
Key Terms
Previous
Slide
End
Show
2 - 15
Next
Slide
Full Employment
Full Production
Productive Efficiency
Allocative Efficiency
Copyright McGraw-Hill/Irwin, 2005
PRODUCTION POSSIBILITIES
The
Foundation of
Economics
Employment
and Efficiency
Unemployment,
Growth, and
the Future
Economic
Systems
The Circular
Flow Model
Key Terms
Previous
Slide
End
Show
2 - 16
Next
Slide
Assumes...
Full Employment
and Productive
Efficiency
Fixed Resources
Fixed Technology
Two Goods
for example...
Copyright McGraw-Hill/Irwin, 2005
The
Foundation of
Economics
Employment
and Efficiency
Unemployment,
Growth, and
the Future
Economic
Systems
The Circular
Flow Model
Key Terms
Previous
Slide
End
Show
2 - 17
Next
Slide
PRODUCTION POSSIBILITIES
A
Consumer
Good
Assumes...
Full Employment
and Productive
Efficiency
Fixed Resources
Fixed Technology
Two Goods
for example...
Copyright McGraw-Hill/Irwin, 2005
PRODUCTION POSSIBILITIES
The
Foundation of
Economics
Employment
and Efficiency
Unemployment,
Growth, and
the Future
Economic
Systems
The Circular
Flow Model
Key Terms
Previous
Slide
End
Show
2 - 18
Next
Slide
A Capital Good
Assumes...
Full Employment
and Productive
Efficiency
Fixed Resources
Fixed Technology
Two Goods
for example...
Copyright McGraw-Hill/Irwin, 2005
PRODUCTION POSSIBILITIES
The
Foundation of
Economics
Employment
and Efficiency
Unemployment,
Growth, and
the Future
What if we could only produce ...
10,000 Robots
or
Economic
Systems
400,000 Pizzas
The Circular
Flow Model
Key Terms
Previous
Slide
End
Show
2 - 19
Next
Slide
Using all of our resources, to
get some pizza, we must give
up some robots!
Copyright McGraw-Hill/Irwin, 2005
for example...
PRODUCTION POSSIBILITIES
The
Foundation of
Economics
in table form
Employment
and Efficiency
PIZZA
Unemployment,
Growth, and
the Future
ROBOTS
(in thousands)
The Circular
Flow Model
Key Terms
End
Show
2 - 20
1
2
3
4
9
7
4
0
(in hundred thousands)
Economic
Systems
Previous
Slide
0
Next
Slide
Copyright McGraw-Hill/Irwin, 2005
10
PRODUCTION POSSIBILITIES
The
Foundation of
Economics
in table form
Employment
and Efficiency
PIZZA
Unemployment,
Growth, and
the Future
ROBOTS
2
3
4
9
7
4
0
(in hundred thousands)
10
(in thousands)
Key Terms
Next
Slide
Copyright McGraw-Hill/Irwin, 2005
(thousands)
Robots
The Circular
Flow Model
End
Show
2 - 21
1
graphical form
Economic
Systems
Previous
Slide
0
Pizzas (hundred thousands)
PRODUCTION POSSIBILITIES
The
Foundation of
Economics
in table form
Employment
and Efficiency
PIZZA
Unemployment,
Growth, and
the Future
ROBOTS
2
3
4
9
7
4
0
(in hundred thousands)
10
(in thousands)
Key Terms
Next
Slide
Copyright McGraw-Hill/Irwin, 2005
(thousands)
Robots
The Circular
Flow Model
End
Show
2 - 22
1
graphical form
Economic
Systems
Previous
Slide
0
Pizzas (hundred thousands)
PRODUCTION POSSIBILITIES
The
Foundation of
Economics
in table form
Employment
and Efficiency
PIZZA
Unemployment,
Growth, and
the Future
ROBOTS
2
3
4
9
7
4
0
(in hundred thousands)
10
(in thousands)
Key Terms
Next
Slide
Copyright McGraw-Hill/Irwin, 2005
(thousands)
Robots
The Circular
Flow Model
End
Show
2 - 23
1
graphical form
Economic
Systems
Previous
Slide
0
Pizzas (hundred thousands)
PRODUCTION POSSIBILITIES
The
Foundation of
Economics
in table form
Employment
and Efficiency
PIZZA
Unemployment,
Growth, and
the Future
ROBOTS
2
3
4
9
7
4
0
(in hundred thousands)
10
(in thousands)
Key Terms
Next
Slide
Copyright McGraw-Hill/Irwin, 2005
(thousands)
Robots
The Circular
Flow Model
End
Show
2 - 24
1
graphical form
Economic
Systems
Previous
Slide
0
Pizzas (hundred thousands)
PRODUCTION POSSIBILITIES
The
Foundation of
Economics
in table form
Employment
and Efficiency
PIZZA
Unemployment,
Growth, and
the Future
ROBOTS
2
3
4
9
7
4
0
(in hundred thousands)
10
(in thousands)
Key Terms
Next
Slide
Copyright McGraw-Hill/Irwin, 2005
(thousands)
Robots
The Circular
Flow Model
End
Show
2 - 25
1
graphical form
Economic
Systems
Previous
Slide
0
Pizzas (hundred thousands)
PRODUCTION POSSIBILITIES
The
Foundation of
Economics
in table form
Employment
and Efficiency
PIZZA
Unemployment,
Growth, and
the Future
ROBOTS
2
3
4
9
7
4
0
(in hundred thousands)
10
(in thousands)
Key Terms
Next
Slide
Copyright McGraw-Hill/Irwin, 2005
(thousands)
Robots
The Circular
Flow Model
End
Show
2 - 26
1
graphical form
Economic
Systems
Previous
Slide
0
Pizzas (hundred thousands)
PRODUCTION POSSIBILITIES
The
Foundation of
Economics
Employment
and Efficiency
Unemployment,
Growth, and
the Future
Economic
Systems
The Circular
Flow Model
Key Terms
Previous
Slide
End
Show
2 - 27
Next
Slide
Limited Resources means
a limited output...
At any point in time,
a full-employment, fullproduction economy
must sacrifice some of
product X to obtain
more of product Y.
Copyright McGraw-Hill/Irwin, 2005
PRODUCTION POSSIBILITIES
Employment
and Efficiency
Unemployment,
Growth, and
the Future
Economic
Systems
The Circular
Flow Model
Key Terms
Previous
Slide
End
Show
2 - 28
Next
Slide
Q 14
Robots (thousands)
The
Foundation of
Economics
13
12
11
10
9
8
7
6
5
4
3
2
1
Unattainable
A
B
C
W
Attainable
& Efficient
D
Attainable
but
Inefficient
E
1
2
3
4
5
6
7
Pizzas (hundred thousands)
Copyright McGraw-Hill/Irwin, 2005
8
Q
PRODUCTION POSSIBILITIES
Employment
and Efficiency
Unemployment,
Growth, and
the Future
Economic
Systems
The Circular
Flow Model
Key Terms
Previous
Slide
End
Show
2 - 29
Next
Slide
Q 14
Robots (thousands)
The
Foundation of
Economics
13
12
11
10
9
8
7
6
5
4
3
2
1
Notes...
Unattainable
LAW OF INCREASING
A OPPORTUNITY
COSTS
B
The amount
of other
C
W
products that must be
forgone or D
sacrificed to
Attainable
obtain 1 unit of a specific
product is called the & Efficient
Attainable
opportunity
cost of that
but
good.
Inefficient
E
1
2
3
4
5
6
7
Pizzas (hundred thousands)
Copyright McGraw-Hill/Irwin, 2005
8
Q
PRODUCTION POSSIBILITIES
Employment
and Efficiency
Unemployment,
Growth, and
the Future
Economic
Systems
The Circular
Flow Model
Key Terms
Previous
Slide
End
Show
2 - 30
Next
Slide
Q 14
Robots (thousands)
The
Foundation of
Economics
13
12
11
10
9
8
7
6
5
4
3
2
1
Notes...
Unattainable
LAW OF INCREASING
A OPPORTUNITY
COSTS
B
A graph of the production
C
possibilities curve W
will be
CONCAVE - bowed out from
D
Attainable
the origin.
&
Attainable
Economic resources are
but
not completely adaptInefficient
able
to other uses.
Efficient
1
7
E
2
3
4
5
6
Pizzas (hundred thousands)
Copyright McGraw-Hill/Irwin, 2005
8
Q
Employment
and Efficiency
Unemployment,
Growth, and
the Future
Economic
Systems
The Circular
Flow Model
Key Terms
Previous
Slide
End
Show
2 - 31
Next
Slide
P
Marginal Benefit & Cost
The
Foundation of
Economics
PRODUCTION POSSIBILITIES
Allocative Efficiency: MB=MC
MC
$15
MB=MC
10
5
MB
1
2
3
Quantity of Pizzas
Copyright McGraw-Hill/Irwin, 2005
Q
PRODUCTION POSSIBILITIES
Employment
and Efficiency
Unemployment,
Growth, and
the Future
Economic
Systems
The Circular
Flow Model
Key Terms
Previous
Slide
End
Show
2 - 32
Next
Slide
Q 14
Robots (thousands)
The
Foundation of
Economics
Unemployment &
Underemployment
Shown by Point U
13
12
11
10
9
8
7
6
5
4
3
2
1
More of either or
both is possible
U
1
2
3
4
5
6
7
Pizzas (hundred thousands)
Copyright McGraw-Hill/Irwin, 2005
8
Q
PRODUCTION POSSIBILITIES
Employment
and Efficiency
Unemployment,
Growth, and
the Future
Economic
Systems
The Circular
Flow Model
Key Terms
Previous
Slide
End
Show
2 - 33
Next
Slide
Q 14
Robots (thousands)
The
Foundation of
Economics
13
12
11
10
9
8
7
6
5
4
3
2
1
Notes...Unemployment
Economic Growth
&
Underemployment
The ability to produce
by- Point U
a largerShown
total output
a rightward shift of
the production
More
of
either
or
U
possibilities curve
caused by...both is possible
1
2
3
4
5
6
7
Pizzas (hundred thousands)
Copyright McGraw-Hill/Irwin, 2005
8
Q
PRODUCTION POSSIBILITIES
Employment
and Efficiency
Unemployment,
Growth, and
the Future
Economic
Systems
The Circular
Flow Model
Key Terms
Previous
Slide
End
Show
2 - 34
Next
Slide
Q 14
Robots (thousands)
The
Foundation of
Economics
13
12
11
10
9
8
7
6
5
4
3
2
1
Notes...Unemployment
Economic Growth
&
Underemployment
1 – Increase
in
resource
supplies
Shown
by Point U
2 – Better resource
U quality More of
either or
both is possible
3 – Technological
advances
1
2
3
4
5
6
7
Pizzas (hundred thousands)
Copyright McGraw-Hill/Irwin, 2005
8
Q
PRODUCTION POSSIBILITIES
Employment
and Efficiency
Unemployment,
Growth, and
the Future
Economic
Systems
The Circular
Flow Model
Key Terms
Previous
Slide
End
Show
2 - 35
Next
Slide
Q 14
Robots (thousands)
The
Foundation of
Economics
A’
13
12
11
10
9
8
7
6
5
4
3
2
1
Economic Growth
B’
C’
D’
E’
1
2
3
4
5
6
7
Pizzas (hundred thousands)
Copyright McGraw-Hill/Irwin, 2005
8
Q
PRODUCTION POSSIBILITIES
Employment
and Efficiency
Unemployment,
Growth, and
the Future
Economic
Systems
The Circular
Flow Model
Key Terms
Previous
Slide
End
Show
2 - 36
Next
Slide
Two Examples of Economic Growth
ALTA - FAVORS
PRESENT GOODS
Goods for the Future
The
Foundation of
Economics
CURRENT
CURVE
FUTURE
CURVE
CONSUMPTION
Goods for the Present
Alta
Copyright McGraw-Hill/Irwin, 2005
PRODUCTION POSSIBILITIES
Unemployment,
Growth, and
the Future
Economic
Systems
The Circular
Flow Model
Key Terms
Previous
Slide
End
Show
2 - 37
Next
Slide
ALTA - FAVORS
PRESENT GOODS
CURRENT
CURVE
FUTURE
CURVE
CONSUMPTION
Goods for the Present
Alta
Copyright McGraw-Hill/Irwin, 2005
ZORN - FAVORS
FUTURE GOODS
Goods for the Future
Employment
and Efficiency
Two Examples of Economic Growth
Goods for the Future
The
Foundation of
Economics
CONSUMPTION
FUTURE
CURVE
CURRENT
CURVE
Goods for the Present
Zorn
PRODUCTION POSSIBILITIES
The
Foundation of
Economics
Employment
and Efficiency
Unemployment,
Growth, and
the Future
Applications...
• Unemployment and
Productive Inefficiency
Economic
Systems
The Circular
Flow Model
Key Terms
Previous
Slide
End
Show
2 - 38
Next
Slide
Copyright McGraw-Hill/Irwin, 2005
PRODUCTION POSSIBILITIES
The
Foundation of
Economics
Employment
and Efficiency
Unemployment,
Growth, and
the Future
Economic
Systems
The Circular
Flow Model
Key Terms
Previous
Slide
End
Show
2 - 39
Applications...
• Unemployment and
Productive Inefficiency
• Tradeoffs and
Opportunity Costs
Next
Slide
Copyright McGraw-Hill/Irwin, 2005
PRODUCTION POSSIBILITIES
The
Foundation of
Economics
Employment
and Efficiency
Unemployment,
Growth, and
the Future
Economic
Systems
The Circular
Flow Model
Key Terms
Previous
Slide
End
Show
2 - 40
Next
Slide
Applications...
• Unemployment and
Productive Inefficiency
• Tradeoffs and
Opportunity Costs
• Shifts in the Production
Possibilities Curves
Copyright McGraw-Hill/Irwin, 2005
ECONOMIC SYSTEMS
The
Foundation of
Economics
Employment
and Efficiency
Unemployment,
Growth, and
the Future
THE MARKET SYSTEM
Pure Capitalism
Laissez-faire
Economic
Systems
The Circular
Flow Model
Key Terms
Previous
Slide
End
Show
2 - 41
Next
Slide
Copyright McGraw-Hill/Irwin, 2005
ECONOMIC SYSTEMS
The
Foundation of
Economics
Employment
and Efficiency
Unemployment,
Growth, and
the Future
THE MARKET SYSTEM
Pure Capitalism
Laissez-faire
Economic
Systems
The Circular
Flow Model
Key Terms
Previous
Slide
End
Show
2 - 42
Next
Slide
THE COMMAND SYSTEM
Socialism
Communism
Copyright McGraw-Hill/Irwin, 2005
CIRCULAR FLOW MODEL
The
Foundation of
Economics
RESOURCE
MARKET
Employment
and Efficiency
Unemployment,
Growth, and
the Future
Economic
Systems
The Circular
Flow Model
BUSINESSES
HOUSEHOLDS
Key Terms
Previous
Slide
End
Show
2 - 43
Next
Slide
PRODUCT
MARKET
Copyright McGraw-Hill/Irwin, 2005
CIRCULAR FLOW MODEL
The
Foundation of
Economics
RESOURCE
MARKET
Employment
and Efficiency
Unemployment,
Growth, and
the Future
RESOURCES
INPUTS
Economic
Systems
The Circular
Flow Model
BUSINESSES
HOUSEHOLDS
Key Terms
Previous
Slide
End
Show
2 - 44
Next
Slide
PRODUCT
MARKET
Copyright McGraw-Hill/Irwin, 2005
CIRCULAR FLOW MODEL
The
Foundation of
Economics
$ COSTS
RESOURCE
MARKET
Employment
and Efficiency
Unemployment,
Growth, and
the Future
$ INCOMES
RESOURCES
INPUTS
Economic
Systems
The Circular
Flow Model
Key Terms
Previous
Slide
End
Show
2 - 45
BUSINESSES
HOUSEHOLDS
GOODS &
SERVICES
Next
Slide
GOODS &
SERVICES
PRODUCT
MARKET
Copyright McGraw-Hill/Irwin, 2005
CIRCULAR FLOW MODEL
The
Foundation of
Economics
$ COSTS
RESOURCE
MARKET
Employment
and Efficiency
Unemployment,
Growth, and
the Future
$ INCOMES
RESOURCES
INPUTS
Economic
Systems
The Circular
Flow Model
Key Terms
Previous
Slide
End
Show
2 - 46
BUSINESSES
HOUSEHOLDS
GOODS &
SERVICES
Next
Slide
GOODS &
SERVICES
PRODUCT
MARKET
Copyright McGraw-Hill/Irwin, 2005
CIRCULAR FLOW MODEL
The
Foundation of
Economics
$ COSTS
RESOURCE
MARKET
Employment
and Efficiency
Unemployment,
Growth, and
the Future
$ INCOMES
RESOURCES
INPUTS
Economic
Systems
The Circular
Flow Model
Key Terms
Previous
Slide
End
Show
2 - 47
BUSINESSES
HOUSEHOLDS
GOODS &
SERVICES
Next
Slide
GOODS &
SERVICES
PRODUCT
MARKET
$ REVENUE
Copyright McGraw-Hill/Irwin, 2005
$ CONSUMPTION
CIRCULAR FLOW MODEL
The
Foundation of
Economics
$ COSTS
RESOURCE
MARKET
Employment
and Efficiency
Unemployment,
Growth, and
the Future
$ INCOMES
RESOURCES
INPUTS
Economic
Systems
The Circular
Flow Model
Key Terms
Previous
Slide
End
Show
2 - 48
BUSINESSES
HOUSEHOLDS
GOODS &
SERVICES
Next
Slide
GOODS &
SERVICES
PRODUCT
MARKET
$ REVENUE
Copyright McGraw-Hill/Irwin, 2005
$ CONSUMPTION
economizing problem
economic resources
land
capital
investment
labor
entrepreneurial ability
factors of production
full employment
full production
productive efficiency
allocative efficiency
consumer goods
capital goods
Copyright McGraw-Hill/Irwin, 2005
production possibilities table
production possibilities curve
opportunity cost
law of increasing opportunity
costs
economic growth
economic system
market system
capitalism
command system
resource market
product market
circular flow model
BACK
END
Chapter 3
The
Foundation of
Economics
Employment
and Efficiency
Unemployment,
Growth, and
the Future
Economic
Systems
INDIVIDUAL MARKETS:
DEMAND & SUPPLY
The Circular
Flow Model
Key Terms
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Copyright McGraw-Hill/Irwin, 2005