The Economizing Problem

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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

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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 - PowerPoint PPT Presentation

Transcript of The Economizing Problem

Page 1: The Economizing Problem

The Economizing ProblemHuman economic wants are

unlimited Resources are scarceAll economics depends directly on

these two facts/assumptionsEconomics 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

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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, transportationIncome from capital = Interest

Labor All physical and mental talents of individualsIncome from Labor = Wages

Entrepreneurship Initiative, Management, Innovation, Risk-takingIncome from Entrepreneurship =

Profit/Loss

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Economic SystemsAn 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”

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The two economic sectorsHouseholds - Consumers

individuals in their private lives acting as consumers and producers

Business – Firms - Producersfirms 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 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

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BUSINESSES HOUSEHOLDS

RESOURCEFACTORMARKET

PRODUCTMARKET

Building the Circular Flow Model - Step 1

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BUSINESSES HOUSEHOLDS

RESOURCEFACTORMARKET

RESOURCES INPUTS

PRODUCTMARKET

Building the Circular Flow Model - Step 2

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BUSINESSES HOUSEHOLDS

RESOURCEMARKET

RESOURCES INPUTS

COSTS INCOMES

GOODS &SERVICES

GOODS &SERVICES

PRODUCTMARKET

Building the Circular Flow Model - Step 3

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BUSINESSES HOUSEHOLDS

RESOURCEMARKET

RESOURCES INPUTS

COSTS INCOMES

PRODUCTMARKET

GOODS &SERVICES

GOODS &SERVICES

Building the Circular Flow Model - Step 4

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BUSINESSES HOUSEHOLDS

RESOURCEMARKET

RESOURCES INPUTS

COSTS INCOMES

PRODUCTMARKET

GOODS &SERVICES

GOODS &SERVICES

PAYMENT Goods+Services

REVENUEProfit from goods and services

Building the Circular Flow Model - Step 5

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Factor Market

BUSINESSES HOUSEHOLDS

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???

SpecializationTakes place when people,

businesses, regions, and even countries concentrate on goods and services that they can produce 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 AdvancesRobotics: machines perform physical

tasksInvention: new goods and servicesInnovation: Improving a good or

serviceAutomation: 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

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:

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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 are produced

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 production decreases

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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 opportunity costs Economic growth Economic system Market system Command system Resource market Product market Circular flow model