Chapter 1: The Nature and Methods of Economic Definition of Economics The social science concerned...
-
Upload
nigel-sanders -
Category
Documents
-
view
223 -
download
3
Transcript of Chapter 1: The Nature and Methods of Economic Definition of Economics The social science concerned...
![Page 1: Chapter 1: The Nature and Methods of Economic Definition of Economics The social science concerned with the efficient use of limited or scarce resources.](https://reader036.fdocuments.net/reader036/viewer/2022062423/56649e9a5503460f94b9ce77/html5/thumbnails/1.jpg)
Chapter 1: The Nature and Chapter 1: The Nature and Methods of EconomicMethods of Economic
Definition of EconomicsDefinition of Economics
The social science concerned with the efficient use of limited or scarce resources to achieve maximum satisfaction of human needs.
Human wants are unlimited, but the means to satisfy the wants are limited.
![Page 2: Chapter 1: The Nature and Methods of Economic Definition of Economics The social science concerned with the efficient use of limited or scarce resources.](https://reader036.fdocuments.net/reader036/viewer/2022062423/56649e9a5503460f94b9ce77/html5/thumbnails/2.jpg)
Got stuff?Got stuff?
• Who made it?
• How was it made?
• How did you get it?
![Page 3: Chapter 1: The Nature and Methods of Economic Definition of Economics The social science concerned with the efficient use of limited or scarce resources.](https://reader036.fdocuments.net/reader036/viewer/2022062423/56649e9a5503460f94b9ce77/html5/thumbnails/3.jpg)
I. The Economic ProblemI. The Economic Problem
• the basic economic problem is scarcity:
-- wants are unlimited, but resources
are limited
• so with scarcity, we must make choices,
• and with choices, come costs
![Page 4: Chapter 1: The Nature and Methods of Economic Definition of Economics The social science concerned with the efficient use of limited or scarce resources.](https://reader036.fdocuments.net/reader036/viewer/2022062423/56649e9a5503460f94b9ce77/html5/thumbnails/4.jpg)
2. Products are sometimes classified as luxuries or necessities, but the division is subjective.
3. Services satisfy wants as well as goods.
4. Businesses and governments also have wants.
5. Over time, wants change and multiply.
![Page 5: Chapter 1: The Nature and Methods of Economic Definition of Economics The social science concerned with the efficient use of limited or scarce resources.](https://reader036.fdocuments.net/reader036/viewer/2022062423/56649e9a5503460f94b9ce77/html5/thumbnails/5.jpg)
B. the second fundamental fact: Scarce resources:
1. Economic resources are limited relative to wants.
2. Economic resources are sometimes called factors of production (inputs) and include four categories:
![Page 6: Chapter 1: The Nature and Methods of Economic Definition of Economics The social science concerned with the efficient use of limited or scarce resources.](https://reader036.fdocuments.net/reader036/viewer/2022062423/56649e9a5503460f94b9ce77/html5/thumbnails/6.jpg)
Scarcity and choiceScarcity and choice
• Resources can only be used for one purpose at a time.
• Scarcity requires that choices be made. we have to decide (make a choice) what we will have and what we will forgo
• The cost of any good, service, or activity is the value of what must be given up to obtain it (opportunity cost).
![Page 7: Chapter 1: The Nature and Methods of Economic Definition of Economics The social science concerned with the efficient use of limited or scarce resources.](https://reader036.fdocuments.net/reader036/viewer/2022062423/56649e9a5503460f94b9ce77/html5/thumbnails/7.jpg)
• Cost is the opportunity cost
-- what you give up when you make a choice
-- “there’s no such thing
as a free lunch”
![Page 8: Chapter 1: The Nature and Methods of Economic Definition of Economics The social science concerned with the efficient use of limited or scarce resources.](https://reader036.fdocuments.net/reader036/viewer/2022062423/56649e9a5503460f94b9ce77/html5/thumbnails/8.jpg)
Cost of going to college
-- what you can buy with tuition & fees
-- what you could earn by working
-- what you could do with the free time
![Page 9: Chapter 1: The Nature and Methods of Economic Definition of Economics The social science concerned with the efficient use of limited or scarce resources.](https://reader036.fdocuments.net/reader036/viewer/2022062423/56649e9a5503460f94b9ce77/html5/thumbnails/9.jpg)
• you are willing to give up
-- tuition
-- wages
-- leisure time
to go to college
-- b/c you expect higher income or more rewarding career
![Page 10: Chapter 1: The Nature and Methods of Economic Definition of Economics The social science concerned with the efficient use of limited or scarce resources.](https://reader036.fdocuments.net/reader036/viewer/2022062423/56649e9a5503460f94b9ce77/html5/thumbnails/10.jpg)
economics is the study of choiceseconomics is the study of choices
• of how to allocate scarce resources
• choices made by
-- consumers
-- businesses
-- governments
![Page 11: Chapter 1: The Nature and Methods of Economic Definition of Economics The social science concerned with the efficient use of limited or scarce resources.](https://reader036.fdocuments.net/reader036/viewer/2022062423/56649e9a5503460f94b9ce77/html5/thumbnails/11.jpg)
What are resources?What are resources?
• use resources to produce goods and services
• factors of production
-- land
-- labor
-- capital
-- entrepreneurship
![Page 12: Chapter 1: The Nature and Methods of Economic Definition of Economics The social science concerned with the efficient use of limited or scarce resources.](https://reader036.fdocuments.net/reader036/viewer/2022062423/56649e9a5503460f94b9ce77/html5/thumbnails/12.jpg)
LandLand
• all natural resources
-- land-- minerals
-- water
-- wildlife
![Page 13: Chapter 1: The Nature and Methods of Economic Definition of Economics The social science concerned with the efficient use of limited or scarce resources.](https://reader036.fdocuments.net/reader036/viewer/2022062423/56649e9a5503460f94b9ce77/html5/thumbnails/13.jpg)
LaborLabor
• size of labor force (quantity)
• skills of labor force (quality)
-- human capital
• the value of time
![Page 14: Chapter 1: The Nature and Methods of Economic Definition of Economics The social science concerned with the efficient use of limited or scarce resources.](https://reader036.fdocuments.net/reader036/viewer/2022062423/56649e9a5503460f94b9ce77/html5/thumbnails/14.jpg)
CapitalCapital
• physical capital
-- goods used to make other goods
-- factories
-- machines
-- infrastructure
![Page 15: Chapter 1: The Nature and Methods of Economic Definition of Economics The social science concerned with the efficient use of limited or scarce resources.](https://reader036.fdocuments.net/reader036/viewer/2022062423/56649e9a5503460f94b9ce77/html5/thumbnails/15.jpg)
• NOT financial capital
-- stocks, bonds, bank loans
• financial capital facilitates building of physical capital
![Page 16: Chapter 1: The Nature and Methods of Economic Definition of Economics The social science concerned with the efficient use of limited or scarce resources.](https://reader036.fdocuments.net/reader036/viewer/2022062423/56649e9a5503460f94b9ce77/html5/thumbnails/16.jpg)
entrepreneurshipentrepreneurship
• human resource
• ideas
-- doing things better
-- e-commerce
-- new products
![Page 17: Chapter 1: The Nature and Methods of Economic Definition of Economics The social science concerned with the efficient use of limited or scarce resources.](https://reader036.fdocuments.net/reader036/viewer/2022062423/56649e9a5503460f94b9ce77/html5/thumbnails/17.jpg)
RESOURCE PAYMENTS
Rent or Rental Income
Interest Income
WAGES
PROFIT & LOSS
PROPERTY RESOURCES
LAND
CAPITAL
HUMAN RESOURCES
LABOR
ENTREPRENEUR
![Page 18: Chapter 1: The Nature and Methods of Economic Definition of Economics The social science concerned with the efficient use of limited or scarce resources.](https://reader036.fdocuments.net/reader036/viewer/2022062423/56649e9a5503460f94b9ce77/html5/thumbnails/18.jpg)
Three Questions to answer:Three Questions to answer:
1. What to produce?
2. How to produce the stuff in #1?
3. For whom to produce?
(who gets the stuff in #1?)
![Page 19: Chapter 1: The Nature and Methods of Economic Definition of Economics The social science concerned with the efficient use of limited or scarce resources.](https://reader036.fdocuments.net/reader036/viewer/2022062423/56649e9a5503460f94b9ce77/html5/thumbnails/19.jpg)
Example: A BentleyExample: A Bentley
1. What to produce?• Bentley Motors designs a luxury car with
buyers in mind
• Bentley Motors decides how much to produce give the price and their costs
• Buyers decide how many to buy, based on price, their income, tastes, etc.
![Page 20: Chapter 1: The Nature and Methods of Economic Definition of Economics The social science concerned with the efficient use of limited or scarce resources.](https://reader036.fdocuments.net/reader036/viewer/2022062423/56649e9a5503460f94b9ce77/html5/thumbnails/20.jpg)
• Bentley Motors designs factory, uses machinery, & trains workers to minimize cost BUT retain a certain quality
• government restricts this decision:• Pollution laws
• safety laws
• labor laws
2. How to produce?2. How to produce?
![Page 21: Chapter 1: The Nature and Methods of Economic Definition of Economics The social science concerned with the efficient use of limited or scarce resources.](https://reader036.fdocuments.net/reader036/viewer/2022062423/56649e9a5503460f94b9ce77/html5/thumbnails/21.jpg)
• Those who are willing and able to pay K.D 50,000 for one.
(this is why I don’t have it)
3. Who gets the 3. Who gets the BentleyBentley??
![Page 22: Chapter 1: The Nature and Methods of Economic Definition of Economics The social science concerned with the efficient use of limited or scarce resources.](https://reader036.fdocuments.net/reader036/viewer/2022062423/56649e9a5503460f94b9ce77/html5/thumbnails/22.jpg)
Who answers #1-3?Who answers #1-3?
• pure capitalism
• when buyers and sellers interact to
answer these questions
• markets unrestricted
• private property
• prices coordinate #1-3
![Page 23: Chapter 1: The Nature and Methods of Economic Definition of Economics The social science concerned with the efficient use of limited or scarce resources.](https://reader036.fdocuments.net/reader036/viewer/2022062423/56649e9a5503460f94b9ce77/html5/thumbnails/23.jpg)
• the U.S. is a mixed market economy, since government plays a role
• enforces property rights
• regulates markets
• taxes to provide goods & services
![Page 24: Chapter 1: The Nature and Methods of Economic Definition of Economics The social science concerned with the efficient use of limited or scarce resources.](https://reader036.fdocuments.net/reader036/viewer/2022062423/56649e9a5503460f94b9ce77/html5/thumbnails/24.jpg)
• command system
• the government answers questions 1-3
• former U.S.S.R., N. Korea
• reduced incentives for efficiency
• coordination failures
![Page 25: Chapter 1: The Nature and Methods of Economic Definition of Economics The social science concerned with the efficient use of limited or scarce resources.](https://reader036.fdocuments.net/reader036/viewer/2022062423/56649e9a5503460f94b9ce77/html5/thumbnails/25.jpg)
Why Study Economics?Why Study Economics?Economics for citizenshipEconomics for citizenship
1. Most political problems have an economic aspect, whether it is balancing the budget, fighting over the tax structure (Kuwait is planning to introduce income tax), welfare reform, international trade, or concern for the environment.
2. Both the voters and the elected officials can fulfill their role more effectively if they have an understanding of economic principles.
![Page 26: Chapter 1: The Nature and Methods of Economic Definition of Economics The social science concerned with the efficient use of limited or scarce resources.](https://reader036.fdocuments.net/reader036/viewer/2022062423/56649e9a5503460f94b9ce77/html5/thumbnails/26.jpg)
Why Study Economics? Why Study Economics? Professional and personal applications Professional and personal applications
• Economics helps people to make sense of every day activity they observe around them
• Economic principles enable business managers to make more intelligent decisions.
![Page 27: Chapter 1: The Nature and Methods of Economic Definition of Economics The social science concerned with the efficient use of limited or scarce resources.](https://reader036.fdocuments.net/reader036/viewer/2022062423/56649e9a5503460f94b9ce77/html5/thumbnails/27.jpg)
• Economics can help individuals make better buying decisions, better employment choices, and better financial investments.
• Economics is to examine problems and decisions from a social rather than personal point of view.
![Page 28: Chapter 1: The Nature and Methods of Economic Definition of Economics The social science concerned with the efficient use of limited or scarce resources.](https://reader036.fdocuments.net/reader036/viewer/2022062423/56649e9a5503460f94b9ce77/html5/thumbnails/28.jpg)
Policy economics Policy economics applies economic facts and principles to help resolve
specific problems and to achieve certain economic goals.
• Steps in formulating economic policy:
1. State goals.
2. Recognize various options that can be used to achieve goals.
3. Evaluate the options on the basis of specific criteria important to decision-makers.
![Page 29: Chapter 1: The Nature and Methods of Economic Definition of Economics The social science concerned with the efficient use of limited or scarce resources.](https://reader036.fdocuments.net/reader036/viewer/2022062423/56649e9a5503460f94b9ce77/html5/thumbnails/29.jpg)
Macroeconomics and MicroeconomicsMacroeconomics and Microeconomics
Macroeconomics examines the economy as a whole. It includes measures of total output, total employment, total income, aggregate expenditures, and the general price level.
Microeconomics looks at specific economic units.
• It is concerned with the individual industry, firm or household and the price of specific products and resources.
![Page 30: Chapter 1: The Nature and Methods of Economic Definition of Economics The social science concerned with the efficient use of limited or scarce resources.](https://reader036.fdocuments.net/reader036/viewer/2022062423/56649e9a5503460f94b9ce77/html5/thumbnails/30.jpg)
SpecializationSpecialization
• How do we get the most out of our resources?
• We specialize in what we do best
and trade that for what we need
![Page 31: Chapter 1: The Nature and Methods of Economic Definition of Economics The social science concerned with the efficient use of limited or scarce resources.](https://reader036.fdocuments.net/reader036/viewer/2022062423/56649e9a5503460f94b9ce77/html5/thumbnails/31.jpg)
• I teach.
• I get paid for it.
• I use the money to buy
• food
• oil changes
• clothes
![Page 32: Chapter 1: The Nature and Methods of Economic Definition of Economics The social science concerned with the efficient use of limited or scarce resources.](https://reader036.fdocuments.net/reader036/viewer/2022062423/56649e9a5503460f94b9ce77/html5/thumbnails/32.jpg)
• If I• grew my own food
• made my own clothes
• fixed my own car
• I would not consume as much
• Specialization produces gains!• I can consume more
than what I could make
on my own
![Page 33: Chapter 1: The Nature and Methods of Economic Definition of Economics The social science concerned with the efficient use of limited or scarce resources.](https://reader036.fdocuments.net/reader036/viewer/2022062423/56649e9a5503460f94b9ce77/html5/thumbnails/33.jpg)
Who specializes in what?Who specializes in what?
• Comparative advantage• if you produce a good at a lower
opportunity cost
then you should specialize in it
![Page 34: Chapter 1: The Nature and Methods of Economic Definition of Economics The social science concerned with the efficient use of limited or scarce resources.](https://reader036.fdocuments.net/reader036/viewer/2022062423/56649e9a5503460f94b9ce77/html5/thumbnails/34.jpg)
Example: married coupleExample: married couple
• Husband: surgeon• $250,000 /year
• Wife: 5th grade teacher• $50,000 /year
• who should run the household?• Who has lower opportunity cost?
The wife.
![Page 35: Chapter 1: The Nature and Methods of Economic Definition of Economics The social science concerned with the efficient use of limited or scarce resources.](https://reader036.fdocuments.net/reader036/viewer/2022062423/56649e9a5503460f94b9ce77/html5/thumbnails/35.jpg)
with specialization,with specialization,
• division of labor• different people specialize in different
things
• people become very good at their task
• efficiency gains
-- get more out of same resources
![Page 36: Chapter 1: The Nature and Methods of Economic Definition of Economics The social science concerned with the efficient use of limited or scarce resources.](https://reader036.fdocuments.net/reader036/viewer/2022062423/56649e9a5503460f94b9ce77/html5/thumbnails/36.jpg)
specialization is everywherespecialization is everywhere
• doctors• neurosurgeon, obstetrics, pediatrics,…
• lawyers• divorce, real estate, patent law,
personal injury...
![Page 37: Chapter 1: The Nature and Methods of Economic Definition of Economics The social science concerned with the efficient use of limited or scarce resources.](https://reader036.fdocuments.net/reader036/viewer/2022062423/56649e9a5503460f94b9ce77/html5/thumbnails/37.jpg)
The bottom line:The bottom line:
• Scarcity & opportunity cost are unavoidable.
BUT
• efficiency & specialization
make the most of scarce resources
![Page 38: Chapter 1: The Nature and Methods of Economic Definition of Economics The social science concerned with the efficient use of limited or scarce resources.](https://reader036.fdocuments.net/reader036/viewer/2022062423/56649e9a5503460f94b9ce77/html5/thumbnails/38.jpg)
Employment and Efficiency
Economics is a science of efficiency in the use of scarce resources. Efficiency requires full employment of available resources and full production.
1. Full employment means all available resources should be employed.
2. Full production means that employed resources are providing maximum satisfaction of our economic wants. Underemployment occurs if this is not so.
![Page 39: Chapter 1: The Nature and Methods of Economic Definition of Economics The social science concerned with the efficient use of limited or scarce resources.](https://reader036.fdocuments.net/reader036/viewer/2022062423/56649e9a5503460f94b9ce77/html5/thumbnails/39.jpg)
PIZZA 0 1 2 3 4(in hundred thousands)
ROBOTS 10 9 7 4 0(in thousands)
in table form
PRODUCTION POSSIBILITIES
39
![Page 40: Chapter 1: The Nature and Methods of Economic Definition of Economics The social science concerned with the efficient use of limited or scarce resources.](https://reader036.fdocuments.net/reader036/viewer/2022062423/56649e9a5503460f94b9ce77/html5/thumbnails/40.jpg)
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
40
![Page 41: Chapter 1: The Nature and Methods of Economic Definition of Economics The social science concerned with the efficient use of limited or scarce resources.](https://reader036.fdocuments.net/reader036/viewer/2022062423/56649e9a5503460f94b9ce77/html5/thumbnails/41.jpg)
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
41
![Page 42: Chapter 1: The Nature and Methods of Economic Definition of Economics The social science concerned with the efficient use of limited or scarce resources.](https://reader036.fdocuments.net/reader036/viewer/2022062423/56649e9a5503460f94b9ce77/html5/thumbnails/42.jpg)
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
42
![Page 43: Chapter 1: The Nature and Methods of Economic Definition of Economics The social science concerned with the efficient use of limited or scarce resources.](https://reader036.fdocuments.net/reader036/viewer/2022062423/56649e9a5503460f94b9ce77/html5/thumbnails/43.jpg)
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
43
![Page 44: Chapter 1: The Nature and Methods of Economic Definition of Economics The social science concerned with the efficient use of limited or scarce resources.](https://reader036.fdocuments.net/reader036/viewer/2022062423/56649e9a5503460f94b9ce77/html5/thumbnails/44.jpg)
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
44
![Page 45: Chapter 1: The Nature and Methods of Economic Definition of Economics The social science concerned with the efficient use of limited or scarce resources.](https://reader036.fdocuments.net/reader036/viewer/2022062423/56649e9a5503460f94b9ce77/html5/thumbnails/45.jpg)
PIZZA 0 1 2 3 4(in hundred thousands)
ROBOTS 10 9 7 4 0(in thousands)
in table form
graphical form
Ro
bo
ts(t
ho
usa
nd
s)
Pizzas (hundred thousands)
PRODUCTION POSSIBILITIES
45
![Page 46: Chapter 1: The Nature and Methods of Economic Definition of Economics The social science concerned with the efficient use of limited or scarce resources.](https://reader036.fdocuments.net/reader036/viewer/2022062423/56649e9a5503460f94b9ce77/html5/thumbnails/46.jpg)
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...
46
![Page 47: Chapter 1: The Nature and Methods of Economic Definition of Economics The social science concerned with the efficient use of limited or scarce resources.](https://reader036.fdocuments.net/reader036/viewer/2022062423/56649e9a5503460f94b9ce77/html5/thumbnails/47.jpg)
Choices will be necessary because resources and technology are fixed. A production possibilities table illustrates some of the possible choices.
A production possibilities curve is a graphical representation of choices.
1. Points on the curve represent maximum possible combinations of robots and pizza given resources and technology.
2. Points inside the curve represent underemployment or unemployment.
3. Points outside the curve are unattainable at present.
47
![Page 48: Chapter 1: The Nature and Methods of Economic Definition of Economics The social science concerned with the efficient use of limited or scarce resources.](https://reader036.fdocuments.net/reader036/viewer/2022062423/56649e9a5503460f94b9ce77/html5/thumbnails/48.jpg)
Optimal or best product-mix:
1. It will be some point on the curve.
2. The exact point depends on society; this is a normative decision.
48
![Page 49: Chapter 1: The Nature and Methods of Economic Definition of Economics The social science concerned with the efficient use of limited or scarce resources.](https://reader036.fdocuments.net/reader036/viewer/2022062423/56649e9a5503460f94b9ce77/html5/thumbnails/49.jpg)
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
49
![Page 50: Chapter 1: The Nature and Methods of Economic Definition of Economics The social science concerned with the efficient use of limited or scarce resources.](https://reader036.fdocuments.net/reader036/viewer/2022062423/56649e9a5503460f94b9ce77/html5/thumbnails/50.jpg)
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
50
![Page 51: Chapter 1: The Nature and Methods of Economic Definition of Economics The social science concerned with the efficient use of limited or scarce resources.](https://reader036.fdocuments.net/reader036/viewer/2022062423/56649e9a5503460f94b9ce77/html5/thumbnails/51.jpg)
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.
51
![Page 52: Chapter 1: The Nature and Methods of Economic Definition of Economics The social science concerned with the efficient use of limited or scarce resources.](https://reader036.fdocuments.net/reader036/viewer/2022062423/56649e9a5503460f94b9ce77/html5/thumbnails/52.jpg)
E. Law of increasing opportunity costs:1. The amount of other products that must be
foregone to obtain more of any given product is called the opportunity cost.
2. Opportunity costs are measured in real terms rather than money (market prices are not part of the production possibilities model).
3. The more of a product produced the greater is its (marginal) opportunity cost.
4. The slope of the production possibilities curve becomes steeper, demonstrating increasing opportunity cost. This makes the curve appear bowed out, concave from the origin.52
![Page 53: Chapter 1: The Nature and Methods of Economic Definition of Economics The social science concerned with the efficient use of limited or scarce resources.](https://reader036.fdocuments.net/reader036/viewer/2022062423/56649e9a5503460f94b9ce77/html5/thumbnails/53.jpg)
Economic Rationale:
a. Economic resources are not completely adaptable to alternative uses.
b. To get increasing amounts of pizza, resources that are not particularly well suited for that purpose must be used. Workers that are accustomed to producing robots on an assembly line may not do well as kitchen help.
How does society decide its optimal point on the production possibilities curve?53
![Page 54: Chapter 1: The Nature and Methods of Economic Definition of Economics The social science concerned with the efficient use of limited or scarce resources.](https://reader036.fdocuments.net/reader036/viewer/2022062423/56649e9a5503460f94b9ce77/html5/thumbnails/54.jpg)
Unemployment, Growth, and the Future
Unemployment and productive inefficiency occur when the economy is producing less than full production or inside the curve (point U in the following figure).
In a growing economy, the production possibilities curve shifts outward:
1. when resource supplies expand in quantity or quality.
2. when technological advances are occurring.54
![Page 55: Chapter 1: The Nature and Methods of Economic Definition of Economics The social science concerned with the efficient use of limited or scarce resources.](https://reader036.fdocuments.net/reader036/viewer/2022062423/56649e9a5503460f94b9ce77/html5/thumbnails/55.jpg)
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
55
![Page 56: Chapter 1: The Nature and Methods of Economic Definition of Economics The social science concerned with the efficient use of limited or scarce resources.](https://reader036.fdocuments.net/reader036/viewer/2022062423/56649e9a5503460f94b9ce77/html5/thumbnails/56.jpg)
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...
56
![Page 57: Chapter 1: The Nature and Methods of Economic Definition of Economics The social science concerned with the efficient use of limited or scarce resources.](https://reader036.fdocuments.net/reader036/viewer/2022062423/56649e9a5503460f94b9ce77/html5/thumbnails/57.jpg)
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 – Increase in resource
supplies
2 – Better resource quality
3 – Technological advances
57
![Page 58: Chapter 1: The Nature and Methods of Economic Definition of Economics The social science concerned with the efficient use of limited or scarce resources.](https://reader036.fdocuments.net/reader036/viewer/2022062423/56649e9a5503460f94b9ce77/html5/thumbnails/58.jpg)
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
58
![Page 59: Chapter 1: The Nature and Methods of Economic Definition of Economics The social science concerned with the efficient use of limited or scarce resources.](https://reader036.fdocuments.net/reader036/viewer/2022062423/56649e9a5503460f94b9ce77/html5/thumbnails/59.jpg)
Present choices and future possibilities:
Using resources to produce consumer goods and services represents a choice for present over future consumption. Using resources to invest in technological advances, education, and capital goods represents a choice for future over present goods. The decision as to how to allocate resources in the present will create more or less economic growth in the future.
(See for example Global Perspective 2-1 where various countries are compared with respect to their economic growth rates relative to the share of GDP devoted to investment.)
D. A Qualification: International Trade1. A nation can avoid the output limits of its domestic Production
Possibilities through international specialization and trade.2. Specialization and trade have the same effect as having more and
better resources of improved technology.59
![Page 60: Chapter 1: The Nature and Methods of Economic Definition of Economics The social science concerned with the efficient use of limited or scarce resources.](https://reader036.fdocuments.net/reader036/viewer/2022062423/56649e9a5503460f94b9ce77/html5/thumbnails/60.jpg)
Two Examples of Economic GrowthALTA - FAVORS
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
Alta60
![Page 61: Chapter 1: The Nature and Methods of Economic Definition of Economics The social science concerned with the efficient use of limited or scarce resources.](https://reader036.fdocuments.net/reader036/viewer/2022062423/56649e9a5503460f94b9ce77/html5/thumbnails/61.jpg)
Two Examples of Economic GrowthALTA - FAVORS
PRESENT GOODSZORN - FAVORSFUTURE 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
Alta Zorn61
![Page 62: Chapter 1: The Nature and Methods of Economic Definition of Economics The social science concerned with the efficient use of limited or scarce resources.](https://reader036.fdocuments.net/reader036/viewer/2022062423/56649e9a5503460f94b9ce77/html5/thumbnails/62.jpg)
Economic systems
Economic systems differ in two important ways: Who owns the factors of production and the method used to coordinate economic activity.
A. The market system:
1. There is private ownership of resources.2. Markets and prices coordinate and direct economic activity.3. Each participant acts in his or her own self-interest.4. In pure capitalism the government plays a very limited role.
62
![Page 63: Chapter 1: The Nature and Methods of Economic Definition of Economics The social science concerned with the efficient use of limited or scarce resources.](https://reader036.fdocuments.net/reader036/viewer/2022062423/56649e9a5503460f94b9ce77/html5/thumbnails/63.jpg)
Economic systems
B. Command economy, socialism or communism:
1. There is public (state) ownership of resources.
2. Economic activity is coordinated by central planning.
C. Mixed economy
63
![Page 64: Chapter 1: The Nature and Methods of Economic Definition of Economics The social science concerned with the efficient use of limited or scarce resources.](https://reader036.fdocuments.net/reader036/viewer/2022062423/56649e9a5503460f94b9ce77/html5/thumbnails/64.jpg)
SpecializationSpecialization
• How do we get the most out of our resources?
• We specialize in what we do best
and trade that for what we need
![Page 65: Chapter 1: The Nature and Methods of Economic Definition of Economics The social science concerned with the efficient use of limited or scarce resources.](https://reader036.fdocuments.net/reader036/viewer/2022062423/56649e9a5503460f94b9ce77/html5/thumbnails/65.jpg)
• I teach.
• I get paid for it.
• I use the money to buy
• food
• oil changes
• clothes
![Page 66: Chapter 1: The Nature and Methods of Economic Definition of Economics The social science concerned with the efficient use of limited or scarce resources.](https://reader036.fdocuments.net/reader036/viewer/2022062423/56649e9a5503460f94b9ce77/html5/thumbnails/66.jpg)
• If I• grew my own food
• made my own clothes
• fixed my own car
• I would not consume as much
• Specialization produces gains!• I can consume more
than what I could make
on my own
![Page 67: Chapter 1: The Nature and Methods of Economic Definition of Economics The social science concerned with the efficient use of limited or scarce resources.](https://reader036.fdocuments.net/reader036/viewer/2022062423/56649e9a5503460f94b9ce77/html5/thumbnails/67.jpg)
Who specializes in what?Who specializes in what?
• Comparative advantage• if you produce a good at a lower
opportunity cost
then you should specialize in it
![Page 68: Chapter 1: The Nature and Methods of Economic Definition of Economics The social science concerned with the efficient use of limited or scarce resources.](https://reader036.fdocuments.net/reader036/viewer/2022062423/56649e9a5503460f94b9ce77/html5/thumbnails/68.jpg)
Example: married coupleExample: married couple
• Husband: surgeon• $250,000 /year
• Wife: 5th grade teacher• $50,000 /year
• who should run the household?• Who has lower opportunity cost?
The wife.
![Page 69: Chapter 1: The Nature and Methods of Economic Definition of Economics The social science concerned with the efficient use of limited or scarce resources.](https://reader036.fdocuments.net/reader036/viewer/2022062423/56649e9a5503460f94b9ce77/html5/thumbnails/69.jpg)
with specialization,with specialization,
• division of labor• different people specialize in different
things
• people become very good at their task
• efficiency gains
-- get more out of same resources
![Page 70: Chapter 1: The Nature and Methods of Economic Definition of Economics The social science concerned with the efficient use of limited or scarce resources.](https://reader036.fdocuments.net/reader036/viewer/2022062423/56649e9a5503460f94b9ce77/html5/thumbnails/70.jpg)
specialization is everywherespecialization is everywhere
• doctors• neurosurgeon, obstetrics, pediatrics,…
• lawyers• divorce, real estate, patent law,
personal injury...
![Page 71: Chapter 1: The Nature and Methods of Economic Definition of Economics The social science concerned with the efficient use of limited or scarce resources.](https://reader036.fdocuments.net/reader036/viewer/2022062423/56649e9a5503460f94b9ce77/html5/thumbnails/71.jpg)
The bottom line:The bottom line:
• Scarcity & opportunity cost are unavoidable.
BUT
• efficiency & specialization
make the most of scarce resources
![Page 72: Chapter 1: The Nature and Methods of Economic Definition of Economics The social science concerned with the efficient use of limited or scarce resources.](https://reader036.fdocuments.net/reader036/viewer/2022062423/56649e9a5503460f94b9ce77/html5/thumbnails/72.jpg)
Employment and Efficiency
Economics is a science of efficiency in the use of scarce resources. Efficiency requires full employment of available resources and full production.
1. Full employment means all available resources should be employed.
2. Full production means that employed resources are providing maximum satisfaction of our economic wants. Underemployment occurs if this is not so.
![Page 73: Chapter 1: The Nature and Methods of Economic Definition of Economics The social science concerned with the efficient use of limited or scarce resources.](https://reader036.fdocuments.net/reader036/viewer/2022062423/56649e9a5503460f94b9ce77/html5/thumbnails/73.jpg)
PIZZA 0 1 2 3 4(in hundred thousands)
ROBOTS 10 9 7 4 0(in thousands)
in table form
PRODUCTION POSSIBILITIES
73
![Page 74: Chapter 1: The Nature and Methods of Economic Definition of Economics The social science concerned with the efficient use of limited or scarce resources.](https://reader036.fdocuments.net/reader036/viewer/2022062423/56649e9a5503460f94b9ce77/html5/thumbnails/74.jpg)
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
74
![Page 75: Chapter 1: The Nature and Methods of Economic Definition of Economics The social science concerned with the efficient use of limited or scarce resources.](https://reader036.fdocuments.net/reader036/viewer/2022062423/56649e9a5503460f94b9ce77/html5/thumbnails/75.jpg)
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
75
![Page 76: Chapter 1: The Nature and Methods of Economic Definition of Economics The social science concerned with the efficient use of limited or scarce resources.](https://reader036.fdocuments.net/reader036/viewer/2022062423/56649e9a5503460f94b9ce77/html5/thumbnails/76.jpg)
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
76
![Page 77: Chapter 1: The Nature and Methods of Economic Definition of Economics The social science concerned with the efficient use of limited or scarce resources.](https://reader036.fdocuments.net/reader036/viewer/2022062423/56649e9a5503460f94b9ce77/html5/thumbnails/77.jpg)
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
77
![Page 78: Chapter 1: The Nature and Methods of Economic Definition of Economics The social science concerned with the efficient use of limited or scarce resources.](https://reader036.fdocuments.net/reader036/viewer/2022062423/56649e9a5503460f94b9ce77/html5/thumbnails/78.jpg)
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
78
![Page 79: Chapter 1: The Nature and Methods of Economic Definition of Economics The social science concerned with the efficient use of limited or scarce resources.](https://reader036.fdocuments.net/reader036/viewer/2022062423/56649e9a5503460f94b9ce77/html5/thumbnails/79.jpg)
PIZZA 0 1 2 3 4(in hundred thousands)
ROBOTS 10 9 7 4 0(in thousands)
in table form
graphical form
Ro
bo
ts(t
ho
usa
nd
s)
Pizzas (hundred thousands)
PRODUCTION POSSIBILITIES
79
![Page 80: Chapter 1: The Nature and Methods of Economic Definition of Economics The social science concerned with the efficient use of limited or scarce resources.](https://reader036.fdocuments.net/reader036/viewer/2022062423/56649e9a5503460f94b9ce77/html5/thumbnails/80.jpg)
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...
80
![Page 81: Chapter 1: The Nature and Methods of Economic Definition of Economics The social science concerned with the efficient use of limited or scarce resources.](https://reader036.fdocuments.net/reader036/viewer/2022062423/56649e9a5503460f94b9ce77/html5/thumbnails/81.jpg)
Choices will be necessary because resources and technology are fixed. A production possibilities table illustrates some of the possible choices.
A production possibilities curve is a graphical representation of choices.
1. Points on the curve represent maximum possible combinations of robots and pizza given resources and technology.
2. Points inside the curve represent underemployment or unemployment.
3. Points outside the curve are unattainable at present.
81
![Page 82: Chapter 1: The Nature and Methods of Economic Definition of Economics The social science concerned with the efficient use of limited or scarce resources.](https://reader036.fdocuments.net/reader036/viewer/2022062423/56649e9a5503460f94b9ce77/html5/thumbnails/82.jpg)
Optimal or best product-mix:
1. It will be some point on the curve.
2. The exact point depends on society; this is a normative decision.
82
![Page 83: Chapter 1: The Nature and Methods of Economic Definition of Economics The social science concerned with the efficient use of limited or scarce resources.](https://reader036.fdocuments.net/reader036/viewer/2022062423/56649e9a5503460f94b9ce77/html5/thumbnails/83.jpg)
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
83
![Page 84: Chapter 1: The Nature and Methods of Economic Definition of Economics The social science concerned with the efficient use of limited or scarce resources.](https://reader036.fdocuments.net/reader036/viewer/2022062423/56649e9a5503460f94b9ce77/html5/thumbnails/84.jpg)
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
84
![Page 85: Chapter 1: The Nature and Methods of Economic Definition of Economics The social science concerned with the efficient use of limited or scarce resources.](https://reader036.fdocuments.net/reader036/viewer/2022062423/56649e9a5503460f94b9ce77/html5/thumbnails/85.jpg)
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.
85
![Page 86: Chapter 1: The Nature and Methods of Economic Definition of Economics The social science concerned with the efficient use of limited or scarce resources.](https://reader036.fdocuments.net/reader036/viewer/2022062423/56649e9a5503460f94b9ce77/html5/thumbnails/86.jpg)
E. Law of increasing opportunity costs:1. The amount of other products that must be
foregone to obtain more of any given product is called the opportunity cost.
2. Opportunity costs are measured in real terms rather than money (market prices are not part of the production possibilities model).
3. The more of a product produced the greater is its (marginal) opportunity cost.
4. The slope of the production possibilities curve becomes steeper, demonstrating increasing opportunity cost. This makes the curve appear bowed out, concave from the origin.86
![Page 87: Chapter 1: The Nature and Methods of Economic Definition of Economics The social science concerned with the efficient use of limited or scarce resources.](https://reader036.fdocuments.net/reader036/viewer/2022062423/56649e9a5503460f94b9ce77/html5/thumbnails/87.jpg)
The Market The Market System and System and the Circular the Circular FlowFlow
2C H A P T E R
![Page 88: Chapter 1: The Nature and Methods of Economic Definition of Economics The social science concerned with the efficient use of limited or scarce resources.](https://reader036.fdocuments.net/reader036/viewer/2022062423/56649e9a5503460f94b9ce77/html5/thumbnails/88.jpg)
PROPERTY RESOURCESPROPERTY RESOURCES
1. LAND1. LAND
2. CAPITAL2. CAPITAL
HUMAN RESOURCESHUMAN RESOURCES
3. LABOR3. LABOR
4. ENTREPRENEURIAL ABILITY4. ENTREPRENEURIAL ABILITY
SCARCE RESOURCESSCARCE RESOURCESECONOMIC RESOURCESECONOMIC RESOURCES
![Page 89: Chapter 1: The Nature and Methods of Economic Definition of Economics The social science concerned with the efficient use of limited or scarce resources.](https://reader036.fdocuments.net/reader036/viewer/2022062423/56649e9a5503460f94b9ce77/html5/thumbnails/89.jpg)
Resource payments: correspond to resource Resource payments: correspond to resource categoriescategories
RENTALRENTALINCOMEINCOME
INTERESTINTERESTINCOMEINCOME
WAGESWAGES
PROFIT &PROFIT &LOSSLOSS
PROPERTY RESOURCESPROPERTY RESOURCES
LANDLAND
CAPITALCAPITAL
HUMAN RESOURCESHUMAN RESOURCES
LABORLABOR
ENTREPRENEURENTREPRENEUR
![Page 90: Chapter 1: The Nature and Methods of Economic Definition of Economics The social science concerned with the efficient use of limited or scarce resources.](https://reader036.fdocuments.net/reader036/viewer/2022062423/56649e9a5503460f94b9ce77/html5/thumbnails/90.jpg)
Macroeconomics Starts Here
![Page 91: Chapter 1: The Nature and Methods of Economic Definition of Economics The social science concerned with the efficient use of limited or scarce resources.](https://reader036.fdocuments.net/reader036/viewer/2022062423/56649e9a5503460f94b9ce77/html5/thumbnails/91.jpg)
Economic SystemsEconomic Systems
• Definition: A particular set of institutional arrangements and a coordinating mechanism to respond to the economizing problem.
• Economic systems differ as to:
1) who owns the factors of production
2) the method used to motivate, coordinate, and direct economic activity.
![Page 92: Chapter 1: The Nature and Methods of Economic Definition of Economics The social science concerned with the efficient use of limited or scarce resources.](https://reader036.fdocuments.net/reader036/viewer/2022062423/56649e9a5503460f94b9ce77/html5/thumbnails/92.jpg)
The Command SystemThe Command System
• The government owns most property resources and economic decision making occur through a central economic plan.
• The central planning board determines production goals for each firm and resources to be allocated.
![Page 93: Chapter 1: The Nature and Methods of Economic Definition of Economics The social science concerned with the efficient use of limited or scarce resources.](https://reader036.fdocuments.net/reader036/viewer/2022062423/56649e9a5503460f94b9ce77/html5/thumbnails/93.jpg)
The Market SystemThe Market System
• There is private ownership of resources.
• Markets and prices coordinate and direct economic activity.
• Each participant acts in its own self-interest.
• In pure capitalism the government plays a very limited role.
![Page 94: Chapter 1: The Nature and Methods of Economic Definition of Economics The social science concerned with the efficient use of limited or scarce resources.](https://reader036.fdocuments.net/reader036/viewer/2022062423/56649e9a5503460f94b9ce77/html5/thumbnails/94.jpg)
Characteristics of the Market Characteristics of the Market SystemSystem
• Private Property.
• Freedom of firms to choose.
• Self interest.
• Competition.
• Markets and prices.
• Technology and capital goods.
• Specialization.
• Use of money.
• Active, but limited government.
![Page 95: Chapter 1: The Nature and Methods of Economic Definition of Economics The social science concerned with the efficient use of limited or scarce resources.](https://reader036.fdocuments.net/reader036/viewer/2022062423/56649e9a5503460f94b9ce77/html5/thumbnails/95.jpg)
The Circular Flow Model The Circular Flow Model
• There are two groups of decision makers in There are two groups of decision makers in the private economy: households the private economy: households (resource (resource owners)owners) and businesses and businesses (resource users)(resource users)
• The market system The market system (resource markets and (resource markets and product markets)product markets) coordinates these coordinates these decisions.decisions.
![Page 96: Chapter 1: The Nature and Methods of Economic Definition of Economics The social science concerned with the efficient use of limited or scarce resources.](https://reader036.fdocuments.net/reader036/viewer/2022062423/56649e9a5503460f94b9ce77/html5/thumbnails/96.jpg)
What happens in the resource markets? What happens in the resource markets?
a.a. Households Households sellsell resources directly or resources directly or indirectly (through ownership of corporations) to indirectly (through ownership of corporations) to businesses.businesses.
b. Businesses b. Businesses buybuy resources in order to produce resources in order to produce goods and services.goods and services.
c.c. Interaction of these sellers and buyers Interaction of these sellers and buyers determines the determines the price of each resourceprice of each resource, which , which in turn provides in turn provides incomeincome for the owner of that for the owner of that resource.resource.
d.d. Flow of payments from businesses for the Flow of payments from businesses for the resources constitutes business resources constitutes business costscosts and and resource owners’ resource owners’ incomesincomes..
![Page 97: Chapter 1: The Nature and Methods of Economic Definition of Economics The social science concerned with the efficient use of limited or scarce resources.](https://reader036.fdocuments.net/reader036/viewer/2022062423/56649e9a5503460f94b9ce77/html5/thumbnails/97.jpg)
What happens in the product markets?What happens in the product markets?a. Households are on the a. Households are on the buyingbuying side of these side of these
markets, purchasing goods and services.markets, purchasing goods and services.
b.b. Businesses are on the Businesses are on the sellingselling side of side of these markets, offering products for sale.these markets, offering products for sale.
c.c. Interaction of these buyers and sellers Interaction of these buyers and sellers determines the price of each product.determines the price of each product.
d.d. Flow of consumer expenditures Flow of consumer expenditures constitutes constitutes sales receiptssales receipts for businesses. for businesses.
![Page 98: Chapter 1: The Nature and Methods of Economic Definition of Economics The social science concerned with the efficient use of limited or scarce resources.](https://reader036.fdocuments.net/reader036/viewer/2022062423/56649e9a5503460f94b9ce77/html5/thumbnails/98.jpg)
CIRCULAR FLOW MODEL
BUSINESSES HOUSEHOLDS
RESOURCEMARKET
PRODUCTMARKET
![Page 99: Chapter 1: The Nature and Methods of Economic Definition of Economics The social science concerned with the efficient use of limited or scarce resources.](https://reader036.fdocuments.net/reader036/viewer/2022062423/56649e9a5503460f94b9ce77/html5/thumbnails/99.jpg)
BUSINESSES HOUSEHOLDS
RESOURCEMARKET
RESOURCES INPUTS
PRODUCTMARKET
CIRCULAR FLOW MODEL
![Page 100: Chapter 1: The Nature and Methods of Economic Definition of Economics The social science concerned with the efficient use of limited or scarce resources.](https://reader036.fdocuments.net/reader036/viewer/2022062423/56649e9a5503460f94b9ce77/html5/thumbnails/100.jpg)
BUSINESSES HOUSEHOLDS
RESOURCEMARKET
RESOURCES INPUTS
$ COSTS $ INCOMES
GOODS &GOODS &SERVICESSERVICES
GOODS &GOODS &SERVICESSERVICES
PRODUCTMARKET
CIRCULAR FLOW MODEL
![Page 101: Chapter 1: The Nature and Methods of Economic Definition of Economics The social science concerned with the efficient use of limited or scarce resources.](https://reader036.fdocuments.net/reader036/viewer/2022062423/56649e9a5503460f94b9ce77/html5/thumbnails/101.jpg)
BUSINESSES HOUSEHOLDS
RESOURCEMARKET
RESOURCES INPUTS
$ COSTS $ INCOMES
PRODUCTMARKET
GOODS &SERVICES
GOODS &SERVICES
CIRCULAR FLOW MODEL
![Page 102: Chapter 1: The Nature and Methods of Economic Definition of Economics The social science concerned with the efficient use of limited or scarce resources.](https://reader036.fdocuments.net/reader036/viewer/2022062423/56649e9a5503460f94b9ce77/html5/thumbnails/102.jpg)
BUSINESSES HOUSEHOLDS
RESOURCEMARKET
RESOURCES INPUTS
$ COSTS $ INCOMES
PRODUCTMARKET
GOODS &SERVICES
GOODS &SERVICES
$ CONSUMPTION$ REVENUE
CIRCULAR FLOW MODEL
![Page 103: Chapter 1: The Nature and Methods of Economic Definition of Economics The social science concerned with the efficient use of limited or scarce resources.](https://reader036.fdocuments.net/reader036/viewer/2022062423/56649e9a5503460f94b9ce77/html5/thumbnails/103.jpg)
CIRCULAR FLOW MODEL
BUSINESSES HOUSEHOLDS
RESOURCEMARKET
RESOURCES INPUTS
$ COSTS $ INCOMES
PRODUCTMARKET
GOODS &SERVICES
GOODS &SERVICES
$ CONSUMPTION$ REVENUE
![Page 104: Chapter 1: The Nature and Methods of Economic Definition of Economics The social science concerned with the efficient use of limited or scarce resources.](https://reader036.fdocuments.net/reader036/viewer/2022062423/56649e9a5503460f94b9ce77/html5/thumbnails/104.jpg)
More Realistic Circular FlowMore Realistic Circular Flow
![Page 105: Chapter 1: The Nature and Methods of Economic Definition of Economics The social science concerned with the efficient use of limited or scarce resources.](https://reader036.fdocuments.net/reader036/viewer/2022062423/56649e9a5503460f94b9ce77/html5/thumbnails/105.jpg)
Macroeconomic PoliciesMacroeconomic Policies