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
it’s 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
INCOMES
RESOURCE
MARKET
RESOURCES
INPUTS
BUSINESSES
HOUSEHOLDS
GOODS &
SERVICES
GOODS &
SERVICES
PRODUCT
MARKET
Building the Circular Flow Model - Step 4
COSTS
INCOMES
RESOURCE
MARKET
RESOURCES
INPUTS
BUSINESSES
HOUSEHOLDS
GOODS &
SERVICES
GOODS &
SERVICES
PRODUCT
MARKET
Building the Circular Flow Model - Step 5
COSTS
INCOMES
RESOURCE
MARKET
RESOURCES
INPUTS
BUSINESSES
HOUSEHOLDS
GOODS &
SERVICES
REVENUE
Profit from goods
and services
GOODS &
SERVICES
PRODUCT
MARKET
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
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
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Economizing problem
Utility
Economic resources
Land
Capital
Investment
Labor
Entrepreneurial ability
Factors of production
Full employment
Full production
Productive efficiency
Allocative efficiency
Consumer goods
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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