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2 - 1Copyright McGraw-Hill/Irwin, 2002
The Foundation of Economics
Employment and Efficiency
Unemployment, Growth, and the Future
Economic Systems
The Circular Flow Model
Key Terms
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The Economizing
Problem2C H A P T E R
2 - 2Copyright McGraw-Hill/Irwin, 2002
The Foundation of Economics
Employment and Efficiency
Unemployment, Growth, and the Future
Economic Systems
The Circular Flow Model
Key Terms
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THE FOUNDATION OF ECONOMICS
SOCIETY HAS VIRTUALLYUNLIMITED WANTS...
2 - 3Copyright McGraw-Hill/Irwin, 2002
The Foundation of Economics
Employment and Efficiency
Unemployment, Growth, and the Future
Economic Systems
The Circular Flow Model
Key Terms
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BUT LIMITED OR SCARCEPRODUCTIVE RESOURCES!
SOCIETY HAS VIRTUALLYUNLIMITED WANTS...
THE FOUNDATION OF ECONOMICS
2 - 4Copyright McGraw-Hill/Irwin, 2002
The Foundation of Economics
Employment and Efficiency
Unemployment, Growth, and the Future
Economic Systems
The Circular Flow Model
Key Terms
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GOODS & SERVICES PROVIDE...
UTILITY
2 - 5Copyright McGraw-Hill/Irwin, 2002
The Foundation of Economics
Employment and Efficiency
Unemployment, Growth, and the Future
Economic Systems
The Circular Flow Model
Key Terms
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LUXURIES
GOODS & SERVICES PROVIDE...
UTILITY
2 - 6Copyright McGraw-Hill/Irwin, 2002
The Foundation of Economics
Employment and Efficiency
Unemployment, Growth, and the Future
Economic Systems
The Circular Flow Model
Key Terms
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LUXURIES vs. NECESSITIES
GOODS & SERVICES PROVIDE...
UTILITY
2 - 7Copyright McGraw-Hill/Irwin, 2002
The Foundation of Economics
Employment and Efficiency
Unemployment, Growth, and the Future
Economic Systems
The Circular Flow Model
Key Terms
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PROPERTY RESOURCES
LAND
SCARCE RESOURCESECONOMIC RESOURCES
2 - 8Copyright McGraw-Hill/Irwin, 2002
The Foundation of Economics
Employment and Efficiency
Unemployment, Growth, and the Future
Economic Systems
The Circular Flow Model
Key Terms
PreviousSlide
NextSlide
EndShow
PROPERTY RESOURCES
LAND
CAPITAL
SCARCE RESOURCESECONOMIC RESOURCES
2 - 9Copyright McGraw-Hill/Irwin, 2002
The Foundation of Economics
Employment and Efficiency
Unemployment, Growth, and the Future
Economic Systems
The Circular Flow Model
Key Terms
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PROPERTY RESOURCES
LAND
CAPITAL
SCARCE RESOURCESECONOMIC RESOURCES
Notes...
INVESTMENT
FINANCIALCAPITAL
REALCAPITAL
2 - 10Copyright McGraw-Hill/Irwin, 2002
The Foundation of Economics
Employment and Efficiency
Unemployment, Growth, and the Future
Economic Systems
The Circular Flow Model
Key Terms
PreviousSlide
NextSlide
EndShow
PROPERTY RESOURCES
LAND
CAPITAL
HUMAN RESOURCES
SCARCE RESOURCESECONOMIC RESOURCES
2 - 11Copyright McGraw-Hill/Irwin, 2002
The Foundation of Economics
Employment and Efficiency
Unemployment, Growth, and the Future
Economic Systems
The Circular Flow Model
Key Terms
PreviousSlide
NextSlide
EndShow
PROPERTY RESOURCES
LAND
CAPITAL
HUMAN RESOURCES
LABOR
SCARCE RESOURCESECONOMIC RESOURCES
2 - 12Copyright McGraw-Hill/Irwin, 2002
The Foundation of Economics
Employment and Efficiency
Unemployment, Growth, and the Future
Economic Systems
The Circular Flow Model
Key Terms
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PROPERTY RESOURCES
LAND
CAPITAL
HUMAN RESOURCES
LABOR
ENTREPRENEURIAL ABILITY
SCARCE RESOURCESECONOMIC RESOURCES
A/K/AFactors
OfProduction
2 - 13Copyright McGraw-Hill/Irwin, 2002
The Foundation of Economics
Employment and Efficiency
Unemployment, Growth, and the Future
Economic Systems
The Circular Flow Model
Key Terms
PreviousSlide
NextSlide
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ENTREPRENEURIAL ABILITY
Takes The Initiative
Makes Policy Decisions
Innovator
The Risk Bearer
2 - 14Copyright McGraw-Hill/Irwin, 2002
The Foundation of Economics
Employment and Efficiency
Unemployment, Growth, and the Future
Economic Systems
The Circular Flow Model
Key Terms
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EndShow
RESOURCE PAYMENTS
RENTALINCOME
INTERESTINCOME
WAGESPROFIT &
LOSS
PROPERTY RESOURCES
LAND
CAPITAL
HUMAN RESOURCES
LABOR
ENTREPRENEUR
2 - 15Copyright McGraw-Hill/Irwin, 2002
The Foundation of Economics
Employment and Efficiency
Unemployment, Growth, and the Future
Economic Systems
The Circular Flow Model
Key Terms
PreviousSlide
NextSlide
EndShow
Productive Efficiency
Full Employment
Full Production
Allocative Efficiency
ECONOMICS & EFFICIENCY
2 - 16Copyright McGraw-Hill/Irwin, 2002
The Foundation of Economics
Employment and Efficiency
Unemployment, Growth, and the Future
Economic Systems
The Circular Flow Model
Key Terms
PreviousSlide
NextSlide
EndShow
PRODUCTION POSSIBILITIES
Assumes...EfficiencyFixed ResourcesFixed TechnologyTwo Products
for example...
2 - 17Copyright McGraw-Hill/Irwin, 2002
The Foundation of Economics
Employment and Efficiency
Unemployment, Growth, and the Future
Economic Systems
The Circular Flow Model
Key Terms
PreviousSlide
NextSlide
EndShow
PRODUCTION POSSIBILITIES
Assumes...EfficiencyFixed ResourcesFixed TechnologyTwo Products
for example...
PIZZA
A Consumer Good
2 - 18Copyright McGraw-Hill/Irwin, 2002
The Foundation of Economics
Employment and Efficiency
Unemployment, Growth, and the Future
Economic Systems
The Circular Flow Model
Key Terms
PreviousSlide
NextSlide
EndShow
PRODUCTION POSSIBILITIES
Assumes...EfficiencyFixed ResourcesFixed TechnologyTwo Products
for example...
ROBOT ARMS
A Capital Good
2 - 19Copyright McGraw-Hill/Irwin, 2002
The Foundation of Economics
Employment and Efficiency
Unemployment, Growth, and the Future
Economic Systems
The Circular Flow Model
Key Terms
PreviousSlide
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Using all of our resources, to get some pizza, we must give
up some robot arms!for example...
What if we could only produce ...10,000 Robot Arms
or
400,000 Pizzas
PRODUCTION POSSIBILITIES
2 - 20Copyright McGraw-Hill/Irwin, 2002
The Foundation of Economics
Employment and Efficiency
Unemployment, Growth, and the Future
Economic Systems
The Circular Flow Model
Key Terms
PreviousSlide
NextSlide
EndShow
PIZZA 0 1 2 3 4(in hundred thousands)
Robots 10 9 7 4 0(in thousands)
in table form
PRODUCTION POSSIBILITIES
2 - 21Copyright McGraw-Hill/Irwin, 2002
The Foundation of Economics
Employment and Efficiency
Unemployment, Growth, and the Future
Economic Systems
The Circular Flow Model
Key Terms
PreviousSlide
NextSlide
EndShow
PIZZA 0 1 2 3 4(in hundred thousands)
Robots 10 9 7 4 0(in thousands)
in table form
graphical formR
ob
ots
(th
ou
san
ds)
Pizzas (hundred thousands)
PRODUCTION POSSIBILITIES
2 - 22Copyright McGraw-Hill/Irwin, 2002
The Foundation of Economics
Employment and Efficiency
Unemployment, Growth, and the Future
Economic Systems
The Circular Flow Model
Key Terms
PreviousSlide
NextSlide
EndShow
PIZZA 0 1 2 3 4(in hundred thousands)
Robots 10 9 7 4 0(in thousands)
in table form
graphical formR
ob
ots
(th
ou
san
ds)
Pizzas (hundred thousands)
PRODUCTION POSSIBILITIES
2 - 23Copyright McGraw-Hill/Irwin, 2002
The Foundation of Economics
Employment and Efficiency
Unemployment, Growth, and the Future
Economic Systems
The Circular Flow Model
Key Terms
PreviousSlide
NextSlide
EndShow
PIZZA 0 1 2 3 4(in hundred thousands)
Robots 10 9 7 4 0(in thousands)
in table form
graphical formR
ob
ots
(th
ou
san
ds)
Pizzas (hundred thousands)
PRODUCTION POSSIBILITIES
2 - 24Copyright McGraw-Hill/Irwin, 2002
The Foundation of Economics
Employment and Efficiency
Unemployment, Growth, and the Future
Economic Systems
The Circular Flow Model
Key Terms
PreviousSlide
NextSlide
EndShow
PIZZA 0 1 2 3 4(in hundred thousands)
Robots 10 9 7 4 0(in thousands)
in table form
graphical formR
ob
ots
(th
ou
san
ds)
Pizzas (hundred thousands)
PRODUCTION POSSIBILITIES
2 - 25Copyright McGraw-Hill/Irwin, 2002
The Foundation of Economics
Employment and Efficiency
Unemployment, Growth, and the Future
Economic Systems
The Circular Flow Model
Key Terms
PreviousSlide
NextSlide
EndShow
PIZZA 0 1 2 3 4(in hundred thousands)
Robots 10 9 7 4 0(in thousands)
in table form
graphical formR
ob
ots
(th
ou
san
ds)
Pizzas (hundred thousands)
PRODUCTION POSSIBILITIES
2 - 26Copyright McGraw-Hill/Irwin, 2002
The Foundation of Economics
Employment and Efficiency
Unemployment, Growth, and the Future
Economic Systems
The Circular Flow Model
Key Terms
PreviousSlide
NextSlide
EndShow
PIZZA 0 1 2 3 4(in hundred thousands)
Robots 10 9 7 4 0(in thousands)
in table form
graphical formR
ob
ots
(th
ou
san
ds)
Pizzas (hundred thousands)
PRODUCTION POSSIBILITIES
2 - 27Copyright McGraw-Hill/Irwin, 2002
The Foundation of Economics
Employment and Efficiency
Unemployment, Growth, and the Future
Economic Systems
The Circular Flow Model
Key Terms
PreviousSlide
NextSlide
EndShow
At any point in time, a full-employment, full-production economy must sacrifice some of product X to obtain more of product Y.
PRODUCTION POSSIBILITIESLimited Resources meansa limited output...
2 - 28Copyright McGraw-Hill/Irwin, 2002
The Foundation of Economics
Employment and Efficiency
Unemployment, Growth, and the Future
Economic Systems
The Circular Flow Model
Key Terms
PreviousSlide
NextSlide
EndShow
Q
Ro
bo
ts (t
ho
usa
nd
s)
Pizzas (hundred thousands)
1413121110 9 8 7 6 5 4 3 2 1
1 2 3 4 5 6 7 8
A B
C
D
E
W
Attainablebut
Inefficient
Unattainable
Attainable& Efficient
PRODUCTION POSSIBILITIES
2 - 29Copyright McGraw-Hill/Irwin, 2002
The Foundation of Economics
Employment and Efficiency
Unemployment, Growth, and the Future
Economic Systems
The Circular Flow Model
Key Terms
PreviousSlide
NextSlide
EndShow
Q
Q
Ro
bo
ts (t
ho
usa
nd
s)
Pizzas (hundred thousands)
1413121110 9 8 7 6 5 4 3 2 1
1 2 3 4 5 6 7 8
A B
C
D
E
W
Attainablebut
Inefficient
Unattainable
Attainable& Efficient
PRODUCTION POSSIBILITIES
Notes...
The amount of other products that must beforgone or sacrificed to obtain 1 unit of a specific product is called the opportunity cost of that good.
LAW OF INCREASINGOPPORTUNITY COSTS
2 - 30Copyright McGraw-Hill/Irwin, 2002
The Foundation of Economics
Employment and Efficiency
Unemployment, Growth, and the Future
Economic Systems
The Circular Flow Model
Key Terms
PreviousSlide
NextSlide
EndShow
Ro
bo
ts
Ro
bo
ts (t
ho
usa
nd
s)(t
ho
usa
nd
s)
Pizzas Pizzas (hundred thousands)(hundred thousands)
14141313121211111010 99 88 77 66 55 44 33 22 11
1 2 3 4 5 6 7 81 2 3 4 5 6 7 8
A B
C
D
E
W
Attainablebut
Inefficient
UnattainableUnattainable
AttainableAttainable& Efficient& Efficient
PRODUCTION POSSIBILITIES
Notes...LAW OF INCREASINGOPPORTUNITY COSTS
A graph of the production possibilities curve will be CONCAVE - bowed out from the origin.
Economic resources arenot completely adapt-able to other uses.
2 - 31Copyright McGraw-Hill/Irwin, 2002
The Foundation of Economics
Employment and Efficiency
Unemployment, Growth, and the Future
Economic Systems
The Circular Flow Model
Key Terms
PreviousSlide
NextSlide
EndShow
P
Q
Mar
gin
al B
enef
it &
Co
st
Quantity of Pizzas
$15
10
5
1 2 3
PRODUCTION POSSIBILITIES
MC
MB
Allocative Efficiency: MB=MC
MB=MC
2 - 32Copyright McGraw-Hill/Irwin, 2002
The Foundation of Economics
Employment and Efficiency
Unemployment, Growth, and the Future
Economic Systems
The Circular Flow Model
Key Terms
PreviousSlide
NextSlide
EndShow
Q
Q
Ro
bo
ts (t
ho
usa
nd
s)
Pizzas (hundred thousands)
1413121110 9 8 7 6 5 4 3 2 1
1 2 3 4 5 6 7 8
U
Unemployment &Underemployment Shown by Point U
More of either orboth is possible
PRODUCTION POSSIBILITIES
2 - 33Copyright McGraw-Hill/Irwin, 2002
The Foundation of Economics
Employment and Efficiency
Unemployment, Growth, and the Future
Economic Systems
The Circular Flow Model
Key Terms
PreviousSlide
NextSlide
EndShow
Q
Q
Ro
bo
ts (t
ho
usa
nd
s)
Pizzas (hundred thousands)
1413121110 9 8 7 6 5 4 3 2 1
1 2 3 4 5 6 7 8
U
Unemployment &Underemployment Shown by Point U
More of either orboth is possible
PRODUCTION POSSIBILITIES
Notes...Economic Growth
The ability to producea larger total output -a rightward shift of the production possibilities curve caused by...
2 - 34Copyright McGraw-Hill/Irwin, 2002
The Foundation of Economics
Employment and Efficiency
Unemployment, Growth, and the Future
Economic Systems
The Circular Flow Model
Key Terms
PreviousSlide
NextSlide
EndShow
Q
Q
Ro
bo
ts (t
ho
usa
nd
s)
Pizzas (hundred thousands)
1413121110 9 8 7 6 5 4 3 2 1
1 2 3 4 5 6 7 8
U
Unemployment &Underemployment Shown by Point U
More of either orboth is possible
PRODUCTION POSSIBILITIES
Notes...Economic Growth1 - Increases in
resources -
2 - Better resource quality -
3 – Technological advances
2 - 35Copyright McGraw-Hill/Irwin, 2002
The Foundation of Economics
Employment and Efficiency
Unemployment, Growth, and the Future
Economic Systems
The Circular Flow Model
Key Terms
PreviousSlide
NextSlide
EndShow
Economic Growth
Q
Q
Ro
bo
ts (t
ho
usa
nd
s)
Pizzas (hundred thousands)
1413121110 9 8 7 6 5 4 3 2 1
1 2 3 4 5 6 7 8
A’
B’
C’
D’
E’
PRODUCTION POSSIBILITIES
2 - 36Copyright McGraw-Hill/Irwin, 2002
The Foundation of Economics
Employment and Efficiency
Unemployment, Growth, and the Future
Economic Systems
The Circular Flow Model
Key Terms
PreviousSlide
NextSlide
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Two Examples of Economic GrowthFAVORING
PRESENT GOODS
Goods for the Present
Go
od
s fo
r th
e F
utu
reG
oo
ds
for
the
Fu
ture CURRENT
CURVE
FUTURECURVE
CONSUMPTION
PRODUCTION POSSIBILITIES
2 - 37Copyright McGraw-Hill/Irwin, 2002
The Foundation of Economics
Employment and Efficiency
Unemployment, Growth, and the Future
Economic Systems
The Circular Flow Model
Key Terms
PreviousSlide
NextSlide
EndShow
Two Examples of Economic GrowthFAVORING
PRESENT GOODSFAVORING
FUTURE GOODS
Goods for the Present
Go
od
s fo
r th
e F
utu
re CURRENTCURVE
FUTURECURVE
CONSUMPTION
Goods for the Present
Go
od
s fo
r th
e F
utu
re
FUTURECURVE
CONSUMPTION
CURRENTCURVE
PRODUCTION POSSIBILITIES
2 - 38Copyright McGraw-Hill/Irwin, 2002
The Foundation of Economics
Employment and Efficiency
Unemployment, Growth, and the Future
Economic Systems
The Circular Flow Model
Key Terms
PreviousSlide
NextSlide
EndShow
Applications...• Unemployment and Productive Inefficiency
PRODUCTION POSSIBILITIES
2 - 39Copyright McGraw-Hill/Irwin, 2002
The Foundation of Economics
Employment and Efficiency
Unemployment, Growth, and the Future
Economic Systems
The Circular Flow Model
Key Terms
PreviousSlide
NextSlide
EndShow
Applications...• Unemployment and Productive Inefficiency• Tradeoffs and
Opportunity Costs
PRODUCTION POSSIBILITIES
2 - 40Copyright McGraw-Hill/Irwin, 2002
The Foundation of Economics
Employment and Efficiency
Unemployment, Growth, and the Future
Economic Systems
The Circular Flow Model
Key Terms
PreviousSlide
NextSlide
EndShow
Applications...• Unemployment and Productive Inefficiency• Tradeoffs and
Opportunity Costs• Shifts and the Production
Possibilities Curve
PRODUCTION POSSIBILITIES
2 - 41Copyright McGraw-Hill/Irwin, 2002
The Foundation of Economics
Employment and Efficiency
Unemployment, Growth, and the Future
Economic Systems
The Circular Flow Model
Key Terms
PreviousSlide
NextSlide
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ECONOMIC SYSTEMS
THE MARKET SYSTEMPure Capitalism Laissez-faire
2 - 42Copyright McGraw-Hill/Irwin, 2002
The Foundation of Economics
Employment and Efficiency
Unemployment, Growth, and the Future
Economic Systems
The Circular Flow Model
Key Terms
PreviousSlide
NextSlide
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ECONOMIC SYSTEMS
THE MARKET SYSTEMPure Capitalism Laissez-faire
THE COMMAND SYSTEMSocialismCommunism
2 - 43Copyright McGraw-Hill/Irwin, 2002
The Foundation of Economics
Employment and Efficiency
Unemployment, Growth, and the Future
Economic Systems
The Circular Flow Model
Key Terms
PreviousSlide
NextSlide
EndShow
CIRCULAR FLOW MODEL
BUSINESSES HOUSEHOLDS
RESOURCEMARKET
PRODUCTMARKET
2 - 44Copyright McGraw-Hill/Irwin, 2002
The Foundation of Economics
Employment and Efficiency
Unemployment, Growth, and the Future
Economic Systems
The Circular Flow Model
Key Terms
PreviousSlide
NextSlide
EndShow
BUSINESSES HOUSEHOLDS
RESOURCEMARKET
RESOURCES INPUTS
PRODUCTMARKET
CIRCULAR FLOW MODEL
2 - 45Copyright McGraw-Hill/Irwin, 2002
The Foundation of Economics
Employment and Efficiency
Unemployment, Growth, and the Future
Economic Systems
The Circular Flow Model
Key Terms
PreviousSlide
NextSlide
EndShow
BUSINESSES HOUSEHOLDS
RESOURCEMARKET
RESOURCES INPUTS
$ COSTS $ INCOMES
GOODS &GOODS &SERVICESSERVICES
GOODS &GOODS &SERVICESSERVICES
PRODUCTMARKET
CIRCULAR FLOW MODEL
2 - 46Copyright McGraw-Hill/Irwin, 2002
The Foundation of Economics
Employment and Efficiency
Unemployment, Growth, and the Future
Economic Systems
The Circular Flow Model
Key Terms
PreviousSlide
NextSlide
EndShow
BUSINESSES HOUSEHOLDS
RESOURCEMARKET
RESOURCES INPUTS
$ COSTS $ INCOMES
PRODUCTMARKET
GOODS &SERVICES
GOODS &SERVICES
CIRCULAR FLOW MODEL
2 - 47Copyright McGraw-Hill/Irwin, 2002
The Foundation of Economics
Employment and Efficiency
Unemployment, Growth, and the Future
Economic Systems
The Circular Flow Model
Key Terms
PreviousSlide
NextSlide
EndShow
BUSINESSES HOUSEHOLDS
RESOURCEMARKET
RESOURCES INPUTS
$ COSTS $ INCOMES
PRODUCTMARKET
GOODS &SERVICES
GOODS &SERVICES
$ CONSUMPTION$ REVENUE
CIRCULAR FLOW MODEL
2 - 48Copyright McGraw-Hill/Irwin, 2002
The Foundation of Economics
Employment and Efficiency
Unemployment, Growth, and the Future
Economic Systems
The Circular Flow Model
Key Terms
PreviousSlide
NextSlide
EndShow
CIRCULAR FLOW MODEL
BUSINESSES HOUSEHOLDS
RESOURCEMARKET
RESOURCES INPUTS
$ COSTS $ INCOMES
PRODUCTMARKET
GOODS &SERVICES
GOODS &SERVICES
$ CONSUMPTION$ REVENUE
ChapterConclusions
economizing problemutilityeconomic resourceslandcapitalinvestmentlaborentrepreneurial abilityfactors of productionfull employmentfull productionproductive efficiencyallocative efficiencyconsumer goodscapital goods
production possibilities tableproduction possibilities curveopportunity costlaw of increasing opportunity
costs
economic growth
economic system
market system
capitalism
command system
resource market
product market
circular flow model
Copyright McGraw-Hill/Irwin, 2002 BACK END
2 - 50Copyright McGraw-Hill/Irwin, 2002
The Foundation of Economics
Employment and Efficiency
Unemployment, Growth, and the Future
Economic Systems
The Circular Flow Model
Key Terms
PreviousSlide
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INDIVIDUAL MARKETS
DEMAND & SUPPLY
Chapter 3
Coming Soon…
