The
Foundation of
Economics
Factors of
Production
Employment
and Efficiency
Production
Possibility
Curves
Economic
Systems
The Circular
Flow Model
2-1
Production
The
Foundation of
Economics
Factors of
Production
Employment
and Efficiency
Production
Possibility
Curves
Economic
Systems
The Circular
Flow Model
2-2
THE FOUNDATION OF
ECONOMICS
SOCIETY HAS VIRTUALLY
UNLIMITED WANTS...
The
Foundation of
Economics
Factors of
Production
Employment
and Efficiency
THE FOUNDATION OF
ECONOMICS
SOCIETY HAS VIRTUALLY
UNLIMITED WANTS...
Production
Possibility
Curves
Economic
Systems
The Circular
Flow Model
BUT SCARCE PRODUCTIVE
RESOURCES!
2-3
GOODS & SERVICES PROVIDE...
The
Foundation of
Economics
Factors of
Production
Employment
and Efficiency
Production
Possibility
Curves
Economic
Systems
The Circular
Flow Model
2-4
UTILITY
GOODS & SERVICES PROVIDE...
The
Foundation of
Economics
Factors of
Production
Employment
and Efficiency
Production
Possibility
Curves
Economic
Systems
The Circular
Flow Model
2-5
UTILITY
WANTS vs. NEEDS
SCARCE RESOURCES
The
Foundation of
Economics
FACTORS OF PRODUCTION
Factors of
Production
Employment
and Efficiency
Production
Possibility
Curves
Economic
Systems
The Circular
Flow Model
2-6
LAND
SCARCE RESOURCES
The
Foundation of
Economics
FACTORS OF PRODUCTION
Factors of
Production
Employment
and Efficiency
LAND
Production
Possibility
Curves
CAPITAL
Economic
Systems
The Circular
Flow Model
2-7
SCARCE RESOURCES
The
Foundation of
Economics
FACTORS OF PRODUCTION
Factors of
Production
Employment
and Efficiency
LAND
Production
Possibility
Curves
CAPITAL
Economic
Systems
The Circular
Flow Model
2-8
SCARCE RESOURCES
The
Foundation of
Economics
FACTORS OF PRODUCTION
Factors of
Production
Employment
and Efficiency
LAND
Production
Possibility
Curves
CAPITAL
Economic
Systems
The Circular
Flow Model
LABOR
2-9
SCARCE RESOURCES
The
Foundation of
Economics
FACTORS OF PRODUCTION
Factors of
Production
Employment
and Efficiency
LAND
Production
Possibility
Curves
CAPITAL
Economic
Systems
The Circular
Flow Model
LABOR
ENTREPRENEURS
2 - 10
ENTREPRENEURS
The
Foundation of
Economics
Factors of
Production
Employment
and Efficiency
Production
Possibility
Curves
Economic
Systems
The Circular
Flow Model
2 - 11
•Make Business Decisions
•Create Something New
• Company
• Product
• Process
•Innovator
•Risk Bearer
RESOURCE PAYMENTS
The
Foundation of
Economics
Factors of
Production
Employment
and Efficiency
Production
Possibility
Curves
LAND
RENT
CAPITAL
INTEREST
LABOR
WAGES
PROFIT &
LOSS
Economic
Systems
The Circular
Flow Model
ENTREPRENEUR
2 - 12
The
Foundation of
Economics
Factors of
Production
Employment
and Efficiency
Production
Possibility
Curves
Resources & Scarcity
Let’s illustrate this
with a challenge.
Economic
Systems
The Circular
Flow Model
2 - 13
We need 4 teams.
Group by seats.
ECONOMICS & EFFICIENCY
The
Foundation of
Economics
Factors of
Production
Employment
and Efficiency
Production
Possibility
Curves
Economic
Systems
The Circular
Flow Model
2 - 14
Full Employment
Full Production
•Productive Efficiency
•Allocative Efficiency
The
Foundation of
Economics
Factors of
Production
Employment
and Efficiency
Production
Possibility
Curves
Economic
Systems
PRODUCTION POSSIBILITIES
Assumes...
•Full Employment
•Productive Efficiency
•Fixed Resources
•Fixed Technology
•Two Goods
The Circular
Flow Model
for example...
2 - 15
PRODUCTION POSSIBILITIES
The
Foundation of
Economics
A Consumer Good
Factors of
Production
Employment
and Efficiency
Production
Possibility
Curves
Economic
Systems
The Circular
Flow Model
for example...
2 - 16
PRODUCTION POSSIBILITIES
The
Foundation of
Economics
A Capital Good
Factors of
Production
Employment
and Efficiency
Production
Possibility
Curves
Economic
Systems
The Circular
Flow Model
for example...
2 - 17
PRODUCTION POSSIBILITIES
The
Foundation of
Economics
Factors of
Production
Employment
and Efficiency
Production
Possibility
Curves
Economic
Systems
The Circular
Flow Model
2 - 18
What if we could only produce ...
10,000 Robots
or
400,000 Pizzas
PRODUCTION POSSIBILITIES
The
Foundation of
Economics
Factors of
Production
Employment
and Efficiency
Production
Possibility
Curves
Economic
Systems
The Circular
Flow Model
2 - 19
Scarce resources means
a limited output...
At any point in time,
an economy must
sacrifice some of
product X to obtain
more of product Y.
PRODUCTION POSSIBILITIES
The
Foundation of
Economics
Factors of
Production
Employment
and Efficiency
Production
Possibility
Curves
Economic
Systems
The Circular
Flow Model
2 - 20
in table form
PIZZA
0
1
2
3
4
9
7
4
0
(in hundred thousands)
ROBOTS
(in thousands)
10
PRODUCTION POSSIBILITIES
Employment
and Efficiency
Production
Possibility
Curves
Economic
Systems
The Circular
Flow Model
2 - 21
PIZZA
0
1
2
3
4
9
7
4
0
(in hundred thousands)
ROBOTS
10
(in thousands)
graphical form
(thousands)
Factors of
Production
in table form
Robots
The
Foundation of
Economics
Pizzas (hundred thousands)
PRODUCTION POSSIBILITIES
Employment
and Efficiency
Production
Possibility
Curves
Economic
Systems
The Circular
Flow Model
2 - 22
PIZZA
0
1
2
3
4
9
7
4
0
(in hundred thousands)
ROBOTS
10
(in thousands)
graphical form
(thousands)
Factors of
Production
in table form
Robots
The
Foundation of
Economics
Pizzas (hundred thousands)
PRODUCTION POSSIBILITIES
Employment
and Efficiency
Production
Possibility
Curves
Economic
Systems
The Circular
Flow Model
2 - 23
PIZZA
0
1
2
3
4
9
7
4
0
(in hundred thousands)
ROBOTS
10
(in thousands)
graphical form
(thousands)
Factors of
Production
in table form
Robots
The
Foundation of
Economics
Pizzas (hundred thousands)
PRODUCTION POSSIBILITIES
Employment
and Efficiency
Production
Possibility
Curves
Economic
Systems
The Circular
Flow Model
2 - 24
PIZZA
0
1
2
3
4
9
7
4
0
(in hundred thousands)
ROBOTS
10
(in thousands)
graphical form
(thousands)
Factors of
Production
in table form
Robots
The
Foundation of
Economics
Pizzas (hundred thousands)
PRODUCTION POSSIBILITIES
Employment
and Efficiency
Production
Possibility
Curves
Economic
Systems
The Circular
Flow Model
2 - 25
PIZZA
0
1
2
3
4
9
7
4
0
(in hundred thousands)
ROBOTS
10
(in thousands)
graphical form
(thousands)
Factors of
Production
in table form
Robots
The
Foundation of
Economics
Pizzas (hundred thousands)
PRODUCTION POSSIBILITIES
Employment
and Efficiency
Production
Possibility
Curves
Economic
Systems
The Circular
Flow Model
2 - 26
PIZZA
0
1
2
3
4
9
7
4
0
(in hundred thousands)
ROBOTS
10
(in thousands)
graphical form
(thousands)
Factors of
Production
in table form
Robots
The
Foundation of
Economics
Pizzas (hundred thousands)
PRODUCTION POSSIBILITIES
Factors of
Production
Employment
and Efficiency
Production
Possibility
Curves
Economic
Systems
The Circular
Flow Model
Q 14
Robots (thousands)
The
Foundation of
Economics
13
12
11
10
9
8
7
6
5
4
3
2
1
Unattainable
A
C
W
Attainable
& Efficient
D
Attainable
but
Inefficient
E
1
2 - 27
B
2
3
4
5
6
7
Pizzas (hundred thousands)
8
Q
The
Foundation of
Economics
Factors of
Production
Employment
and Efficiency
Production
Possibility
Curves
Economic
Systems
The Circular
Flow Model
Law of Increasing
Opportunity Cost
• Economic resources are not
completely adaptable to other
uses
• To make more of X it costs more
and more of Y
• This makes the Production
Possibility Curve:
– Bowed out from the origin
– Concave
2 - 28
PRODUCTION POSSIBILITIES
Factors of
Production
Employment
and Efficiency
Production
Possibility
Curves
Economic
Systems
The Circular
Flow Model
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
1
2 - 29
More of either or
both is possible
U
2
3
4
5
6
7
Pizzas (hundred thousands)
8
Q
PRODUCTION POSSIBILITIES
Factors of
Production
Employment
and Efficiency
Production
Possibility
Curves
Economic
Systems
The Circular
Flow Model
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
caused by...
1
2 - 30
More of either or
both is possible
U
2
3
4
5
6
7
Pizzas (hundred thousands)
8
Q
PRODUCTION POSSIBILITIES
Factors of
Production
Employment
and Efficiency
Production
Possibility
Curves
Economic
Systems
The Circular
Flow Model
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 – More
resources
Shown by Point U
2 – Better resources
3 – Technology
More
of either or
both is possible
4 – Capital Goods
U
1
2 - 31
2
3
4
5
6
7
Pizzas (hundred thousands)
8
Q
PRODUCTION POSSIBILITIES
Factors of
Production
Employment
and Efficiency
Production
Possibility
Curves
Economic
Systems
The Circular
Flow Model
Q 14
Robots (thousands)
The
Foundation of
Economics
A’
13
12
11
10
9
8
7
6
5
4
3
2
1
C’
D’
E’
1
2 - 32
Economic Growth
B’
2
3
4
5
6
7
Pizzas (hundred thousands)
8
Q
PRODUCTION POSSIBILITIES
The
Foundation of
Economics
Factors of
Production
Employment
and Efficiency
Two Examples of Economic Growth
ALTA - FAVORS
Consumer Goods
Production
Possibility
Curves
The Circular
Flow Model
Capital Goods
Economic
Systems
CURRENT
CURVE
FUTURE
CURVE
CONSUMPTION
Consumer Goods
2 - 33
Alta
PRODUCTION POSSIBILITIES
The
Foundation of
Economics
Employment
and Efficiency
ALTA - FAVORS
Consumer Goods
Production
Possibility
Curves
The Circular
Flow Model
CURRENT
CURVE
Capital Goods
Economic
Systems
FUTURE
CURVE
CONSUMPTION
Consumer Goods
2 - 34
ZORN - FAVORS
Capital Goods
Alta
CONSUMPTION
Capital Goods
Factors of
Production
Two Examples of Economic Growth
FUTURE
CURVE
CURRENT
CURVE
Consumer Goods
Zorn
The
Foundation of
Economics
Factors of
Production
Employment
and Efficiency
Production
Possibility
Curves
Economic
Systems
The Circular
Flow Model
2 - 35
Let’s work with Production
Possibility Curves
• Open your packet and
work on Activity 1-2.
PRODUCTION POSSIBILITIES
Factors of
Production
Employment
and Efficiency
Production
Possibility
Curves
Economic
Systems
The Circular
Flow Model
Allocative Efficiency: MB=MC
P
Marginal Benefit & Cost
The
Foundation of
Economics
MC
$15
MB=MC
10
5
MB
1
2 - 36
2
3
Quantity of Pizzas
Q
The
Foundation of
Economics
Factors of
Production
Employment
and Efficiency
Production
Possibility
Curves
Economic
Systems
The Circular
Flow Model
2 - 37
ECONOMIC SYSTEMS
• Who owns the factors of
production?
• Where are the economic decisions
made?
ECONOMIC SYSTEMS
The
Foundation of
Economics
Factors of
Production
Employment
and Efficiency
Production
Possibility
Curves
Economic
Systems
The Circular
Flow Model
2 - 38
THE MARKET SYSTEM
• Pure Capitalism
• Laissez-faire
ECONOMIC SYSTEMS
The
Foundation of
Economics
Factors of
Production
Employment
and Efficiency
Production
Possibility
Curves
Economic
Systems
The Circular
Flow Model
2 - 39
THE MARKET SYSTEM
• Pure Capitalism
• Laissez-faire
THE COMMAND SYSTEM
• Socialism
• Communism
Command System
The
Foundation of
Economics
Factors of
Production
Employment
and Efficiency
Production
Possibility
Curves
Economic
Systems
The Circular
Flow Model
2 - 40
• Soviet Union, Eastern Europe,
China
• System was a failure
– The coordination problem
– The incentive problem
The
Foundation of
Economics
Factors of
Production
Employment
and Efficiency
Production
Possibility
Curves
Economic
Systems
The Circular
Flow Model
2 - 41
Market Versus Command
The
Foundation of
Economics
Factors of
Production
Employment
and Efficiency
Production
Possibility
Curves
Economic
Systems
The Circular
Flow Model
2 - 42
ECONOMIC SYSTEMS
TRADITIONAL SYSTEM
– Based on habits
and/or customs
–Tribal or indigenous
The
Foundation of
Economics
Factors of
Production
Employment
and Efficiency
Production
Possibility
Curves
Economic
Systems
The Circular
Flow Model
2 - 43
Market System
The
Foundation of
Economics
Factors of
Production
Employment
and Efficiency
Production
Possibility
Curves
Economic
Systems
The Circular
Flow Model
2 - 44
Market System
ECONOMIC GOALS
The
Foundation of
Economics
Factors of
Production
Employment
and Efficiency
Production
Possibility
Curves
Economic
Systems
The Circular
Flow Model
2 - 45
•Economic Growth
•Full Employment
•Economic Efficiency
•Price-Level Stability
•Economic Freedom
•Equitable Distribution
•Economic Security
•Balance of Trade
CIRCULAR FLOW MODEL
The
Foundation of
Economics
RESOURCE
MARKET
Factors of
Production
Employment
and Efficiency
Production
Possibility
Curves
Economic
Systems
BUSINESSES
HOUSEHOLDS
The Circular
Flow Model
PRODUCT
MARKET
2 - 46
CIRCULAR FLOW MODEL
The
Foundation of
Economics
RESOURCE
MARKET
Factors of
Production
Employment
and Efficiency
RESOURCES
INPUTS
Production
Possibility
Curves
Economic
Systems
BUSINESSES
HOUSEHOLDS
The Circular
Flow Model
PRODUCT
MARKET
2 - 47
CIRCULAR FLOW MODEL
The
Foundation of
Economics
$ COSTS
RESOURCE
MARKET
Factors of
Production
Employment
and Efficiency
$ INCOMES
RESOURCES
INPUTS
Production
Possibility
Curves
Economic
Systems
The Circular
Flow Model
BUSINESSES
HOUSEHOLDS
GOODS &
SERVICES
GOODS &
SERVICES
PRODUCT
MARKET
2 - 48
CIRCULAR FLOW MODEL
The
Foundation of
Economics
$ COSTS
RESOURCE
MARKET
Factors of
Production
Employment
and Efficiency
$ INCOMES
RESOURCES
INPUTS
Production
Possibility
Curves
Economic
Systems
The Circular
Flow Model
BUSINESSES
HOUSEHOLDS
GOODS &
SERVICES
GOODS &
SERVICES
PRODUCT
MARKET
2 - 49
CIRCULAR FLOW MODEL
The
Foundation of
Economics
$ COSTS
RESOURCE
MARKET
Factors of
Production
Employment
and Efficiency
$ INCOMES
RESOURCES
INPUTS
Production
Possibility
Curves
Economic
Systems
The Circular
Flow Model
BUSINESSES
HOUSEHOLDS
GOODS &
SERVICES
GOODS &
SERVICES
PRODUCT
MARKET
2 - 50
$ REVENUE
$ CONSUMPTION
CIRCULAR FLOW MODEL
The
Foundation of
Economics
$ COSTS
RESOURCE
MARKET
Factors of
Production
Employment
and Efficiency
$ INCOMES
RESOURCES
INPUTS
Production
Possibility
Curves
Economic
Systems
The Circular
Flow Model
BUSINESSES
HOUSEHOLDS
GOODS &
SERVICES
GOODS &
SERVICES
PRODUCT
MARKET
2 - 51
$ REVENUE
$ CONSUMPTION