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The Circular Flow of Economics
Resources, goods and services and money flow continuously among households,
businesses and the government in the U.S. economy.
 Individual households own the resources used in production; sell the resources
and use the income to purchase products.
 Businesses (producers) buy resources used in production; sell the resources and
use the income to purchase products.
 Governments use tax revenue from individuals and businesses to provide public
goods and services.
Businesses provide households with
income and goods and services.
Households supply
businesses with
labor (workforce)
and payments for
goods and services
The government
supplies businesses
with public goods
and services and
payments for
products purchased.
Households
provide the
government
with labor
(workforce)
and taxes
The government provides
households with income
and public goods and
services.
Businesses
provide the
government
with taxes
and goods
and services.
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Production, Consumption & Distribution
Four Questions All Economic Systems Must Address
1. WHAT is produced?
2. HOW should these
goods be produced?
Production
Goods and services must
satisfy the consumers wants
and desires
Factors of Production
Combine the factors of
production to make or
produce the goods and
services
Capital
Entrepreneurship
Land
Labor
Distribution
3. For WHOM are the
goods and services
produced?
4. HOW MANY goods and
services should be
produced?
Getting the goods and
services from producer to
consumer
Consumption
Make enough to have a
large profit and still have
consumer demand. How
many is determined by
supply and demand.
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Unit 7a: Economics
Supply and Demand
Scarcity is the inability to satisfy all
wants at the same time due to limited
resources
Choices must be made as to what to
produce, how much to produce and
who will receive what is produced.
PRICE: Mechanism to decide who gets goods and services. The amount that
satisfies both producers for profit and consumers for value.
Supply and Demand determine price through their interaction.
DEMAND: is the amount of a good or service that consumers are willing and able to buy at a
certain price
SUPPLY: is the amount of a good or service that producers are willing and able to sell at a
certain price.
LAW OF SUPPLY
Businesses will provide more products
when they can sell them at higher
prices
LAW OF DEMAND
Buyers will demand more products when
they can buy them at lower prices
INCENTIVES
Incite or motivate
Change economic behavior
Something that spurs someone into action: sale, coupons, etc.
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Resources, Scarcity & Opportunity Cost
Good
Anything that can be grown or manufactured
(made)
 Food
 Clothes
 Cars
Service
Something a person does for someone else in
exchange for money or value.
 doctor
 hairdresser
 waiter

Natural

Human

Capital
Combine to make goods and services
Resources
Our Basic Economic Problem:
People have
Unlimited Wants
Food, clothing, shelter, schools, hospitals, cars,
transportation
But Resources are
Limited
Land, soil, minerals, fuels, people, money,
technology
SCARCITY
The inability to satisfy all wants at the same time; the NEEDS are greater than the RESOURCES
Since resources are LIMITED consumers and producers must make CHOICES
CHOICE: selecting from a set of alternatives
OPPORTUNITY COST: what is given up when
the choice is made.
Scarcity forces us to choose which needs and wants to satisfy with available resources. Scarcity affects
decisions concerning what and how much to produce, how goods and services will be produced and who
will get what is produced.
Combining resources to make goods and services.
Production
(Sellers)
Available resources and consumer preference
determine what is produced
Consumption
(Buyers)
Using goods and services
Consumer preference and price determine what is
purchased.
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Challenges in a Free Market Vocabulary Terms
Economic
Proposition
Scarcity
Alternatives
Choice
Trade-offs
Opportunity Cost
In English
Lesson for Life
You can't have everything you Acceptance of scarcity will help you make
want.
more reasoned choices.
Different options from which
you can choose.
There are many different ways to allocate
resources and to solve problems.
Because you can't have
everything you want, you have
to make choices from a list of
alternatives.
When policy-makers decide on a
particular resource allocation, recognize
that a choice had to be made due to
scarcity. You may not like the alternative
chosen, you may question the choice, but
the villain is scarcity.
Choices involve giving up
You are responsible for the consequences
something to get something.
of your choices. Since you make choices,
All choices have consequences, you can't be a victim.
both positive and negative.
What is given up when a
choice is made.
All choices have opportunity costs. A
good idea is only a good idea if its value is
greater than the value of its opportunity
cost. Voters must always identify the
opportunity cost of a particular policy.
Economic Systems
The type of economy a country has is based on the amount of government involvement in economic decisions.
Command Economy
 The central government makes decisions and
determines how resources will be used.
 The central government owns property and
resources.
 Businesses are not run for profit.
 No competition
 Lack of consumer choice
 The government sets the prices of goods and
services.
China, North Korea, Cuba
Free Market Economy
 Also known as capitalism or free enterprise
 Private ownership of property and resources
(owned by individuals)
 Individuals and businesses make profits
 Individuals and businesses compete
 Economic decisions are made by supply and
demand
 Profit is a motivator for productivity
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 No government involvement
 Consumer sovereignty: buyers determine what
is produced
Mixed Economy
 Most common type of economic system
 Government and individuals share the decision
making process
 Individuals and businesses make decisions for
the private sector
 Individuals own the means of production
 Government makes plans for the public sector
 Government guides and regulates production of
goods and services offered.
 A greater government role than in a free market
economy
 Most effective economy for providing goods
and services
 U.S. and most Western European countries are
mixed economies.
Who owns the
resources and how
are they allocated?
Who makes the
decisions about
what to make and
sell?
Free Market
Economy
Resources own
privately; allocated
according to price
Consumer and
producers
Mixed Economy
Private individuals
and the government
Command
Economy
Central government
owns and allocates
Consumers and
producers for the
private sector;
government for the
public sector
Central Government
Technology
How are prices
determined?
Advanced
Supply and
demand
Advanced
Competition or
set by
government
Advanced or
developing
Set by
government
Factors of Production
Factors of Production
Anything that goes into the making of a good or service
Capital
tools
machinery
money
technology
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Entrepreneur
Business owner and risk taker
combines the factors of
production
Land
Natural resources
Labor
Workers and their time and
energy
Business Organizations
The 15 million businesses in the U.S. fall into three categories: sole proprietorships, owned by a single individual,
partnerships, with more than one owner sharing the risks and profits and corporations, owned by their stockholders.
Sole Proprietorship
1 owner
 The owner takes all the risks
 Supplies capital, hires help,
pays taxes
 The owner makes all the
profits
 The owner is solely
responsible for losses
b
Partnership
More than one owner (2+)
Corporation
Owned by stockholders
 Risks are shared amongst the
owners
 Profits are shared amongst
the owners
 Often more successful than
sole proprietorships
 Responsibilities are shared
 Authorized to act as a legal
person regardless of the number
of owners
 Owners share the profits
 Liability is limited to
investment (you can only loose
as much as you put in)
 Raise money by selling
stocks
 No one is responsible for
corporation’s debt if it fails
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Sole proprietorships
Advantages
Partnerships
Advantages
Corporations
Advantages
Disadvantages
Disadvantages
Disadvantages
The U.S. Economy
The U.S. Economy is a MIXED economy where individuals, businesses and the government make economic
.
decisions
Money
left over
after all
business
expenses
have been
paid.
Profit
Free
Markets
Markets are allowed to
operate without undue
interference from the
government. Money,
goods and services
flow continuously
among individual
households,
businesses and the
government
Competition
The U.S.
Economy is a
MIXED
Economy
Consumer
Sovereignty
Consumers determine what
goods and services are
produced by what they buy.
Rivalry
between
businesses
for the same
customers;
results in
better
quality.
Private
Property
Individuals
can own the
means of
production
& property
without
undue
government
interference.
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