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THE FOUNDATION OF ECONOMICS

THE FOUNDATION OF ECONOMICS. SOCIETY HAS VIRTUALLY UNLIMITED WANTS. THE FOUNDATION OF ECONOMICS. SOCIETY HAS VIRTUALLY UNLIMITED WANTS. BUT LIMITED OR SCARCE PRODUCTIVE RESOURCES!. GOODS & SERVICES PROVIDE. UTILITY. GOODS & SERVICES PROVIDE. UTILITY. LUXURIES.

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THE FOUNDATION OF ECONOMICS

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  1. THE FOUNDATION OF ECONOMICS SOCIETY HAS VIRTUALLY UNLIMITED WANTS...

  2. THE FOUNDATION OF ECONOMICS SOCIETY HAS VIRTUALLY UNLIMITED WANTS... BUT LIMITED OR SCARCE PRODUCTIVE RESOURCES!

  3. GOODS & SERVICES PROVIDE... UTILITY

  4. GOODS & SERVICES PROVIDE... UTILITY LUXURIES

  5. GOODS & SERVICES PROVIDE... UTILITY LUXURIES vs. NECESSITIES

  6. SCARCE RESOURCES ECONOMIC RESOURCES PROPERTY RESOURCES LAND

  7. SCARCE RESOURCES ECONOMIC RESOURCES PROPERTY RESOURCES LAND CAPITAL

  8. Notes... SCARCE RESOURCES ECONOMIC RESOURCES PROPERTY RESOURCES LAND INVESTMENT REAL CAPITAL CAPITAL FINANCIAL CAPITAL

  9. SCARCE RESOURCES ECONOMIC RESOURCES PROPERTY RESOURCES LAND CAPITAL HUMAN RESOURCES

  10. SCARCE RESOURCES ECONOMIC RESOURCES PROPERTY RESOURCES LAND CAPITAL HUMAN RESOURCES LABOR

  11. SCARCE RESOURCES ECONOMIC RESOURCES PROPERTY RESOURCES A/K/A Factors Of Production LAND CAPITAL HUMAN RESOURCES LABOR ENTREPRENEURIAL ABILITY

  12. ENTREPRENEURIAL ABILITY Takes The Initiative Makes Policy Decisions Innovator The Risk Bearer

  13. PRODUCTION POSSIBILITIES Assumes... Efficiency Fixed Resources Fixed Technology Two Products for example...

  14. PIZZA PRODUCTION POSSIBILITIES A Consumer Good Assumes... Efficiency Fixed Resources Fixed Technology Two Products for example...

  15. ROBOT ARMS PRODUCTION POSSIBILITIES A Capital Good Assumes... Efficiency Fixed Resources Fixed Technology Two Products for example...

  16. PRODUCTION POSSIBILITIES What if we could only produce ... 10,000 Robot Arms or 400,000 Pizzas Using all of our resources, to get some pizza, we must give up some robot arms! for example...

  17. PRODUCTION POSSIBILITIES in table form PIZZA 0 1 2 3 4 (in hundred thousands) Robots 10 9 7 4 0 (in thousands)

  18. PRODUCTION POSSIBILITIES in table form PIZZA 0 1 2 3 4 (in hundred thousands) Robots 10 9 7 4 0 (in thousands) graphical form Robots (thousands) Pizzas (hundred thousands)

  19. PRODUCTION POSSIBILITIES in table form PIZZA 0 1 2 3 4 (in hundred thousands) Robots 10 9 7 4 0 (in thousands) graphical form Robots (thousands) Pizzas (hundred thousands)

  20. PRODUCTION POSSIBILITIES in table form PIZZA 0 1 2 3 4 (in hundred thousands) Robots 10 9 7 4 0 (in thousands) graphical form Robots (thousands) Pizzas (hundred thousands)

  21. PRODUCTION POSSIBILITIES in table form PIZZA 0 1 2 3 4 (in hundred thousands) Robots 10 9 7 4 0 (in thousands) graphical form Robots (thousands) Pizzas (hundred thousands)

  22. PRODUCTION POSSIBILITIES in table form PIZZA 0 1 2 3 4 (in hundred thousands) Robots 10 9 7 4 0 (in thousands) graphical form Robots (thousands) Pizzas (hundred thousands)

  23. PRODUCTION POSSIBILITIES in table form PIZZA 0 1 2 3 4 (in hundred thousands) Robots 10 9 7 4 0 (in thousands) graphical form Robots (thousands) Pizzas (hundred thousands)

  24. PRODUCTION POSSIBILITIES Limited Resources means a limited output... At any point in time, a full-employment, full-production economy must sacrifice some of product X to obtain more of product Y.

  25. PRODUCTION POSSIBILITIES Q 14 13 12 11 10 9 8 7 6 5 4 3 2 1 Unattainable A B C W Attainable & Efficient Robots (thousands) D Attainable but Inefficient E Q 1 2 3 4 5 6 7 8 Pizzas (hundred thousands)

  26. Notes... LAW OF INCREASING OPPORTUNITY COSTS The amount of other products that must be forgone or sacrificed to obtain 1 unit of a specific product is called the opportunity cost of that good. PRODUCTION POSSIBILITIES Q 14 13 12 11 10 9 8 7 6 5 4 3 2 1 Unattainable A B C W Attainable & Efficient Robots (thousands) D Attainable but Inefficient E Q 1 2 3 4 5 6 7 8 Pizzas (hundred thousands)

  27. Notes... LAW OF INCREASING OPPORTUNITY COSTS A graph of the production possibilities curve will beCONCAVE- bowed out from the origin. Economic resources are not completely adapt- able to other uses. PRODUCTION POSSIBILITIES Q 14 13 12 11 10 9 8 7 6 5 4 3 2 1 Unattainable A B C W Attainable & Efficient Robots (thousands) D Attainable but Inefficient E Q 1 2 3 4 5 6 7 8 Pizzas (hundred thousands)

  28. Q 14 13 12 11 10 9 8 7 6 5 4 3 2 1 Robots (thousands) Q 1 2 3 4 5 6 7 8 Pizzas (hundred thousands) PRODUCTION POSSIBILITIES Unemployment & Underemployment Shown by Point U More of either or both is possible U

  29. Q 14 13 12 11 10 9 8 7 6 5 4 3 2 1 Notes... Economic Growth Robots (thousands) Q 1 2 3 4 5 6 7 8 Pizzas (hundred thousands) PRODUCTION POSSIBILITIES Unemployment & Underemployment Shown by Point U The ability to produce a larger total output - a rightward shift of the production possibilities curve caused by... More of either or both is possible U

  30. Q 14 13 12 11 10 9 8 7 6 5 4 3 2 1 Notes... Economic Growth Robots (thousands) Q 1 2 3 4 5 6 7 8 Pizzas (hundred thousands) PRODUCTION POSSIBILITIES Unemployment & Underemployment Shown by Point U 1 - Increases in resources - 2 - Better resource quality - 3 – Technological advances More of either or both is possible U

  31. PRODUCTION POSSIBILITIES Q A’ 14 13 12 11 10 9 8 7 6 5 4 3 2 1 Economic Growth B’ C’ Robots (thousands) D’ E’ Q 1 2 3 4 5 6 7 8 Pizzas (hundred thousands)

  32. PRODUCTION POSSIBILITIES Two Examples of Economic Growth FAVORING PRESENT GOODS CURRENT CURVE FUTURE CURVE Goods for the Future CONSUMPTION Goods for the Present

  33. PRODUCTION POSSIBILITIES Two Examples of Economic Growth FAVORING PRESENT GOODS FAVORING FUTURE GOODS CURRENT CURVE CONSUMPTION FUTURE CURVE FUTURE CURVE Goods for the Future Goods for the Future CURRENT CURVE CONSUMPTION Goods for the Present Goods for the Present

  34. PRODUCTION POSSIBILITIES Applications... • Unemployment and Productive Inefficiency

  35. PRODUCTION POSSIBILITIES Applications... • Unemployment and Productive Inefficiency • Tradeoffs and Opportunity Costs

  36. PRODUCTION POSSIBILITIES Applications... • Unemployment and Productive Inefficiency • Tradeoffs and Opportunity Costs • Shifts and the Production Possibilities Curve

  37. ECONOMIC SYSTEMS • THE MARKET SYSTEM • Pure Capitalism • Laissez-faire

  38. ECONOMIC SYSTEMS • THE MARKET SYSTEM • Pure Capitalism • Laissez-faire • THE COMMAND SYSTEM • Socialism • Communism

  39. CIRCULAR FLOW MODEL RESOURCE MARKET BUSINESSES HOUSEHOLDS PRODUCT MARKET

  40. CIRCULAR FLOW MODEL RESOURCE MARKET RESOURCES INPUTS BUSINESSES HOUSEHOLDS PRODUCT MARKET

  41. CIRCULAR FLOW MODEL $ COSTS $ INCOMES RESOURCE MARKET RESOURCES INPUTS BUSINESSES HOUSEHOLDS GOODS & SERVICES GOODS & SERVICES PRODUCT MARKET

  42. CIRCULAR FLOW MODEL $ COSTS $ INCOMES RESOURCE MARKET RESOURCES INPUTS BUSINESSES HOUSEHOLDS GOODS & SERVICES GOODS & SERVICES PRODUCT MARKET

  43. CIRCULAR FLOW MODEL $ COSTS $ INCOMES RESOURCE MARKET RESOURCES INPUTS BUSINESSES HOUSEHOLDS GOODS & SERVICES GOODS & SERVICES PRODUCT MARKET $ REVENUE $ CONSUMPTION

  44. CIRCULAR FLOW MODEL Chapter Conclusions $ COSTS $ INCOMES RESOURCE MARKET RESOURCES INPUTS BUSINESSES HOUSEHOLDS GOODS & SERVICES GOODS & SERVICES PRODUCT MARKET $ REVENUE $ CONSUMPTION

  45. Chapter 3 INDIVIDUAL MARKETS DEMAND & SUPPLY Coming Soon…

  46. Understanding Macroeconomics -- Our Game Plan • A model is like a road map. It illustrates inter-relationships. • We will use the circular flow of output and income between the business and household sectors to illustrate macro-economic inter-relationships. • As our macroeconomic model is developed, initially, we will assume that monetary policy (the money supply) and fiscal policy (taxes and government expenditures) are constant.

  47. Four Key Markets • Goods and Services Market:Businesses supply goods&services in exchange for sales revenue. Households, investors, governments, and foreigners (net exports)demand goods. • Resource Market:Highly aggregated market where business firms demand resources and households supply labor and other resources in exchange for income.

  48. The Circular Flow Diagram • Four key markets coordinate the circular flow of income. • The resource marketcoordinates the actions of businesses demanding resources and households supplying them in exchange for income. • The goods & services market coordinates the demand for and supply of domestic production (GDP). • The foreign exchange market brings the purchases (imports) from foreigners into balance with the sales (exports plus net inflow of capital) to them. • The loanable funds market brings net household saving and the net inflow of foreign capital into balance with the borrowing of businesses and governments.

  49. What Shall We Give Up?

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