4 The Circular flow of Economics Resources, goods and services and money flow continuously among households, businesses and the government in the U.S. economy.
5 The Circular flow of Economics Continued… 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. Businesses provide households with income and goods and services.Governments use tax revenue from individuals and businesses to provide public goods and services.
7 Businesses provide households with income and goods and services. Households supply businesses with labor (workforce) and payments for goods and servicesThe government supplies businesses with public goods and services and payments for products purchased.Households provide the government with labor (workforce) and taxesBusinesses provide the government with taxes and goods and services.The government provides households with income and public goods and services.
8 Production, Consumption and Distribution Four Questions all Economic Systems must Address
9 Four Questions All Economic Systems must address… What is produced?*Production*Goods and services must satisfy the consumers wants and desires
10 Four Questions All Economic Systems must address… HOW should these goods be produced?*Factors of Production*CapitalEntrepreneurshipLandLaborCombine the factors of production to make or produce the goods and services
14 Four Questions All Economic Systems must address… HOW MANY goods and services should be produced?*Consumption*Make enough to have a large profit and still have consumer demand. How many is determined by supply and demand.
17 Supply and Demand…Scarcity is the inability to satisfy all wants at the same time due to limited resourcesChoices 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.
21 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 priceSUPPLY: is the amount of a good or service that producers are willing and able to sell at a certain price.
22 LAW OF SUPPLY : LAW OF DEMAND: Businesses will provide more products when they can sell them at higher pricesLAW OF DEMAND:Buyers will demand more productswhen they can buy them at lower prices
23 Incentives Incite or motivate Change economic behavior Something that spurs someone into action: sale, coupons, etc.
29 People have Unlimited Wants FoodClothingShelterSchoolsHospitalsCarsTransportation
30 But Resources are Limited LandSoilMineralsFuelsPeopleMoneyTechnology
31 Scarcity The inability to satisfy all wants at the same time; the NEEDS are greater than the RESOURCES
32 Since resources are LIMITED consumers and producers must make CHOICES CHOICE: selecting from a set of alternativesOPPORTUNITY COST: what is given up when the choice is made.
33 *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
34 Production: (sellers) *Combining resources to make goods and services.*Available resources and consumer preference determine what is producedConsumption (buyers)*Using goods and services*Consumer preference and price determine what is purchased
37 Scarcity In English You can't have everything you want. Lessons for lifeAcceptance of scarcity will help you make more reasoned choices
38 Alternatives In English Different options from which you can choose Lessons for LifeThere are many different ways to allocate resources and to solve problemsYes….these are generic converse!
39 ChoiceIn EnglishBecause you can't have everything you want, you have to make choices from a list of alternativesLessons for lifeWhen 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
40 Trade-off’s In English Choices involve giving up something to get something. All choices have consequences, both positive and negativeLessons for LifeYou are responsible for the consequences of your choices. Since you make choices, you can't be a victim.
41 Opportunity Cost In English What is given up when a choice is made Lessons for LifeAll 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
43 Command EconomyThe central government makes decisions and determines how resources will be used.The central government owns property and resources.Businesses are not run for profit.Businesses are not run for profit.No competitionLack of consumer choiceThe government sets the prices of goods and services.China, North Korea, Cuba
45 Mixed Economy Most common type of economic system Government and individuals share the decision making processIndividuals and businesses make decisions for the private sectorIndividuals own the means of productionGovernment makes plans for the public sectorGovernment guides and regulates production of goods and services offered.A greater government role than in a free market economyMost effective economy for providing goods and servicesU.S. and most Western European countries are mixed economies
47 Free Market Economy Also known as capitalism or free enterprise Private ownership of property and resources (owned by individuals)Individuals and businesses make profitsIndividuals and businesses competeEconomic decisions are made by supply and demandProfit is a motivator for productivityNo government involvementConsumer sovereignty: buyers determine what is produced
48 Money left over after all business expenses have been paid. Rivalry between businesses for the same customers; results in better qualityMoney left over after all business expenses have been paid.COMPETITIONPROFITIndividuals can own the means of production & property without undue government interferenceThe U.S. economy isa MIXEDECONOMYFREEMARKETSPRIVATEPROPERTYMarkets are allowed to operate without undue interference from the government. Money, goods and services flow continuously among individual households, businesses and the governmentConsumers determine what goods and services are produced by what they buyCONSUMERSOVEREIGNTY
49 anything that goes into the making of a good or service Factors of Productionanything that goes into the making of a good or service
50 Business owner and risk taker combines the factors of production CapitalEx: tools, machinery, money and technologyEntrepreneurBusiness owner and risk taker combines the factors of production
51 Factors of production cont… LandNatural ResourcesLaborWorkers and their time and energy
52 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.
53 Sole Proprietorship 1 owner The owner takes all the risks Supplies capital, hires help, pays taxesThe owner makes all the profitsThe owner is solely responsible for losses
57 Corporation Owned by stockholders Authorized to act as a legal person regardless of the number of ownersOwners share the profitsLiability is limited to investment (you can only loose as much as you put in)Raise money by selling stocksNo one is responsible for corporation’s debt if it fails