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Unit 1: Basic
Economic Concepts Length: 2.5 Weeks
Chapters: 1 and 2
Assignment: Problem Set #1
I WON THE LOTTERY! I’ll give you anything you want other than money.
What do you want?
Would your list ever end?
Why not?
Scarcity!!!
What is Economics?
Economics is the study of _________.
• Economics is the science of scarcity.
• Scarcity means that we have unlimited wants
but limited resources.
• Since we are unable to have everything we
desire, we must make choices on how we will
use our resources.
choices
In economics we will study the choices of
individuals, firms, and governments.
Textbook Definition Economics- Social science concerned with the
efficient use of scarce resources to achieve
maximum satisfaction of economic wants.
(Study of how individuals and societies deal
with ________)
Examples:
You must choose between buying jeans or buying shoes.
Businesses must choose how many people to hire
Governments must choose how much to spend on
welfare.
scarcity
Micro vs. Macro
MICROeconomics- Study of small economic units such as
individuals, firms, and industries (ex: supply
and demand in specific markets, production
costs, labor markets, etc.)
MACROeconomics- Study of the large economy as a whole or
economic aggregates (ex: economic growth,
government spending, inflation,
unemployment, international trade etc.)
Positive vs. Normative Positive Statements- Based on facts. Avoids value
judgements (what is).
Normative Statements- Includes value judgements
(what ought to be).
How is Economics used?
• Economists use the scientific method to make
generalizations and abstractions to develop
theories. This is called theoretical economics.
• These theories are then applied to fix problems
or meet economic goals. This is called policy
economics.
5 Key Economic Assumptions 1. Society’s wants are unlimited, but ALL resources
are limited (scarcity).
2. Due to scarcity, choices must be made. Every choice
has a cost (a trade-off).
3. Everyone’s goal is to make choices that maximize
their satisfaction. Everyone acts in their own “self-
interest.”
4. Everyone makes decisions by comparing the
marginal costs and marginal benefits of every
choice.
5. Real-life situations can be explained and analyzed
through simplified models and graphs.
8
9
10
11
Would you see the movie three times?
Notice that the total benefit is more than the
total cost but you would NOT watch the movie
the 3rd time.
Thinking at the Margin
# Times
Watching Movie Benefit Cost
1st $30 $10
2nd $15 $10
3rd $5 $10
Total $50 $30
Marginal Analysis In economics the term marginal = additional Marginal analysis (aka: thinking on the margin)
making decisions based on increments Example: • When you decide to go to the mall you consider the
additional benefit and the additional cost (your opportunity cost).
• Once you get to the mall, you continue to use marginal analysis when you shop, buy food, and talk to friends.
• Since your marginal benefits and costs can quickly change your analyzing them every second.
• What if your ex-girlfriend shows up?
The Point: You will continue to do something as long as
the marginal benefit is greater than the marginal cost 13
All Resources are Scarce!
This video was made in 2008.
Did it come true?
Every Thing in Life is About Scarcity!
Scarcity
Analyzing Choices
Given the following assumptions, make a rational
choice in your own self-interest (hold everything
else constant)…
1. You want to visit your friend for a week. You will return Sunday night.
2. You work every weekday earning $100 per day
3. You have three flights to choose from:
Thursday Night Flight = $275
Friday Early Morning Flight = $300
Friday Night Flight = $325
Which flight should you choose? Why? 19
Trade-offs vs. Opportunity Cost ALL decisions involve trade-offs.
Opportunity cost- most desirable alternative
given up when you make a choice. .
Trade-offs - ALL the alternatives that
we give up when we make a choice (Examples: going to the movies)
What are trade-offs of deciding to go to college?
What is the opportunity cost of going to college?
GEICO assumes you understand
opportunity cost. Why? 20
Econ of College
21
Guns and Butter "Every gun that is made, every warship launched, every
rocket fired signifies, in the final sense, a theft from those
who hunger and are not fed, those who are cold and are not
clothed. This world in arms is not spending money alone. It
is spending the sweat of its laborers, the genius of its
scientists, the hopes of its children.”
“The cost of one modern heavy bomber is this: a modern
brick school in more than 30 cities. It is two electric power
plants, each serving a town of 60,000 population. It is two
fine, fully equipped hospitals. It is some fifty miles of
concrete pavement.”
“We pay for a single fighter plane with a half million bushels
of wheat. We pay for a single destroyer with new homes
that could have housed more than 8,000 people.”
-Dwight Eisenhower
Speaking against the military build up of the cold war 22
The USS Dwight Eisenhower
23
Launched in 1975 and cost $679 million ($4.5 billion in 2007 dollars)
23
Economic
Terminology
Utility =
Marginal =
Satisfaction!
Additional!
Allocate = Distribute!
24
Price vs. Cost What’s the price? vs. How much does that cost?
Price= Amount buyer (or consumer) pays
Cost= Amount seller pays to produce a good
Investment Investment= the money spent by BUSINESSES
to improve their production
Ex: $1 Million new factory
25 •Consumer Goods- created for direct consumption
(example: pizza)
•Capital Goods- created for indirect consumption
(oven, blenders, knives, etc.)
•Goods used to make consumer goods
The Four Factors of Production ALL resources can be classified as one of the
following four factors of production:
26
1. Land -All natural resources that are used to produce
goods and services. (Ex: water, sun, plants, animals)
2. Labor -Any effort a person devotes to a task for
which that person is paid. (Ex: manual laborers,
lawyers, doctors, teachers, waiters, etc.)
3. Capital - Physical Capital- Any human-made resource that is used
to create other goods and services ( Ex: tools, tractors, machinery, buildings, factories, etc.)
Human Capital- Any skills or knowledge gained by a worker through education and experience
4. Entrepreneurship -ambitious leaders that
combine the other factors of production to create goods
and services.
• Examples-Henry Ford, Bill Gates, Inventors, Store
Owners, etc.
The Four Factors of Production
Entrepreneurs:
1. Take The Initiative
2. Innovate
3. Act as the Risk Bearers
So they can obtain _________.
Profit = Revenue - Costs
PROFIT
27
Society has unlimited wants but limited resources
The Economizing Problem… Scarcity
WE HAVE A PROBLEM!!
28
The Production
Possibilities Curve
(PPC) Using Economic Models…
Step 1: Explain concept in words
Step 2: Use numbers as examples
Step 3: Generate graphs from numbers
Step 4: Make generalizations using graph
29
What is the Production Possibilities Curve?
• A production possibilities curve (or frontier) is a model that shows alternative ways that an economy can use its scarce resources
• This model graphically demonstrates scarcity, trade-offs, opportunity costs, and efficiency.
4 Key Assumptions
• Only two goods can be produced
• Full employment of resources
• Fixed Resources (Ceteris Paribus)
• Fixed Technology 30
A
B
C
D
E
f
14 12
9
5
0
0
0
2
4
6
8
10
Bikes
Computers
NOW GRAPH IT: Put bikes on y-axis and
computers on x-axis
Production “Possibilities” Table
Each point represents a specific
combination of goods that can be
produced given full employment of
resources.
31
Bik
es
Computers
14
12
10
8
6
4
2
0
0 2 4 6 8 10
A
B
C
D
E
G
Inefficient/
Unemployment
Impossible/Unattainable (given current resources)
Efficient
Production Possibilities How does the PPG graphically demonstrates scarcity,
trade-offs, opportunity costs, and efficiency?
32
2 Bikes
2.The opportunity cost of moving from b to d is…
4.The opportunity cost of moving from f to c is…
3.The opportunity cost of moving from d to b is…
7 Bikes
4 Computer
0 Computers
5.What can you say about point G?
Unattainable
1. The opportunity cost of
moving from a to b is…
Example:
Opportunity Cost
33
The Production Possibilities
Curve (or Frontier)
34
PIZZA 0 1 2 3 4 CALZONES 4 3 2 1 0
• List the Opportunity Cost of moving from a-b,
b-c, c-d, and d-e.
• Constant Opportunity Cost- Resources are
easily adaptable for producing either good.
• Result is a straight line PPC (not common)
Production Possibilities
A B C D E
35
PIZZA 20 19 16 10 0 ROBOTS 0 1 2 3 4
• List the Opportunity Cost of moving from a-b,
b-c, c-d, and d-e.
• Law of Increasing Opportunity Cost-
• As you produce more of any good, the
opportunity cost (forgone production of
another good) will increase.
• Why? Resources are NOT easily adaptable
to producing both goods.
• Result is a bowed out (Concave) PPC
A B C D E Production Possibilities
Constant vs. Increasing
Opportunity Cost
Corn
Wheat
Cactus
Pineapples
Identify which product would have a straight line
PPC and which would be bowed out?
1 Bike 2.The PER UNIT opportunity cost of moving from b to c is…
4.The PER UNIT opportunity cost of moving from d to e is…
3.The PER UNIT opportunity cost of moving from c to d is…
1.5 (3/2) Bikes
2 Bikes
2.5 (5/2) Bikes
= Opportunity Cost
Units Gained
1. The PER UNIT opportunity cost
of moving from a to b is…
Example:
PER UNIT Opportunity Cost How much each marginal
unit costs
NOTICE: Increasing Opportunity Costs 38
The Production Possibilities
Curve and Efficiency
39
Productive Efficiency-
• Products are being produced in the
least costly way.
• This is any point ON the Production
Possibilities Curve
Allocative Efficiency-
• The products being produced are the
ones most desired by society.
• This optimal point on the PPC depends
on the desires of society.
Two Types of Efficiency
40
Productive and Allocative Efficiency B
ikes
Computers
14
12
10
8
6
4
2
0
0 2 4 6 8 10
A
B
C
D
F
E
Which points are productively efficient?
Which are allocatively efficient?
G
41
Productively Efficient combinations are A through D
Allocative Efficient combinations depend on
the wants of society (What if this represents a
country with no electricity?)
Why two types of efficiency?
Size 20 running
shoes
Size 10 running shoes
A
Is combination “A” efficient? Yes and No. It is productively efficient but it is not the
combination society wants
Shifting the Production
Possibilities Curve
43
4 Key Assumptions Revisited
• Only two goods can be produced
• Full employment of resources
• Fixed Resources (4 Factors)
• Fixed Technology
What if there is a change?
3 Shifters of the PPC 1. Change in resource quantity or quality
2. Change in Technology
3. Change in Trade 44
Production Possibilities
Ro
bo
ts
Pizzas
What happens if
there is an increase
in population?
45
Production Possibilities
Ro
bo
ts
Pizzas
What happens if
there is an increase
in population?
46
Production Possibilities
Ro
bo
ts
Pizzas
What if there is a
technology improvement
in pizza ovens
47
Production Possibilities
Ro
bo
ts
Pizzas
What if there is a
technology improvement
in pizza ovens
48
Production Possibilities
Panama – Favors
Consumer Goods
Mexico – Favors
Capital Goods
Consumer goods
Ca
pit
al
Go
od
s
Current
PPC
Future
PPC
Consumer goods
Ca
pit
al
Goo
ds
Future
PPC
Current
PPC
Capital Goods and Future Growth
Mexico Panama 49
Countries that produce more capital goods will have
more growth in the future.
PPC Practice Draw a PPC showing changes for each of the
following:
Pizza and Robots (3)
1. New robot making technology
2. Decrease in the demand for pizza
3. Mad cow disease kills 85% of cows
Consumer goods and Capital Goods (4)
4. Destruction of power plants leads to severe electricity shortage
5. Faster computer hardware
6. Many workers unemployed
7. Significant increases in education
50
New robot making technology
Q
Q
Ro
bo
ts
Pizzas
Question #1
51
A shift only for Robots
Decrease in the demand for pizza
Q
Q
Ro
bo
ts
Pizzas
Question #2
52
The curve doesn’t shift!
A change in demand
doesn’t shift the curve
Mad cow disease kills 85% of cows
Q
Q
Ro
bo
ts
Pizzas
Question #3
53
A shift inward only for
Pizza
Destruction of power plants C
ap
ital G
oo
ds
(G
un
s)
Consumer Goods (Butter)
Question #4
54
Decrease in resources
decrease production
possibilities for both
Faster computer hardware C
ap
ital G
oo
ds
(G
un
s)
Consumer Goods (Butter)
Question #5
55
Quality of a resource
improves shifting the
curve outward
Many workers unemployed C
ap
ital G
oo
ds
(G
un
s)
Consumer Goods (Butter)
Question #6
56
The curve doesn’t shift!
Unemployment is just a
point inside the curve
Significant increases in education
Ca
pit
al G
oo
ds
(G
un
s)
Consumer Goods (Butter)
Question #7
57
The quality of labor is
improved. Curve shifts
outward.
International Trade Why do people trade?
58
Why do people trade?
1. Assume people didn’t trade. What things would
you have to go without?
Everything you don’t produce yourself!
(Clothes, car, cell phone, bananas, health care, etc)
The Point: Everyone specializes in the production
of goods and services and trades it to others
2. What would life be like if cities couldn’t trade
with cities or states couldn’t trade with states?
Limiting trade would reduce people’s choices and
make people worse off.
The Point: More access to trade means more
choices and a higher standard of living. 59
Absolute and Comparative
Advantage
60
Absolute Advantage
One nation can produce more output
with the same resources as the other
61
Comparative Advantage
One nation can produce a good at a lower
opportunity cost than the other
Per Unit Opportunity Cost Review
Assume it costs you $50 to produce 5 t-shirts. What is
your PER UNIT cost for each shirt?
$10 per shirt
Now, take money our of the equation. Instead of
producing 5 shirts you could have made 10 hats.
1. What is your PER UNIT OPPORTUNITY COST for
each shirt in terms of hats given up?
1 shirt costs 2 hats
2. What is your PER UNIT OPPORTUNITY COST for
each hat in terms of shirts given up?
1 hat costs a half of a shirt 62
= Opportunity Cost
Units Gained
Per Unit Opportunity Cost
Per Unit Opportunity Cost Review Ronald McDonald can produce 20 pizzas or 200 burgers
Papa John can produce 100 pizzas or 200 burgers
1. What is Ronald’s opportunity cost for one pizza in
terms of burgers given up?
2. What is Ronald’s opportunity cost for one burger in
terms of pizza given up?
3. What is Papa John’s opportunity cost for one pizza in
terms of burgers given up?
4. What is Papa John’s opportunity cost for one burger
in terms of pizza given up?
63
Ronald has a COMPARATIVE ADVANTGE in the
production of burgers
Papa John has a COMPARATIVE ADVANTAGE in the
production of pizza
1 pizza cost 10 burgers
1 burger costs 1/10 pizza
1 pizza costs 2 burgers
1 burger costs 1/2 pizza
Absolute and Comparative Advantage Absolute Advantage
•The producer that can produce the most output OR
requires the least amount of inputs (resources)
•Ex: Papa John has an absolute advantage in pizzas
because he can produce 100 and Ronald can only
make 20.
Comparative Advantage
•The producer with the lowest opportunity cost.
•Ex: Ronald has a comparative advantage in burgers
because he has a lowest PER UNIT opportunity cost.
64
Countries should trade if they have a relatively lower opportunity cost.
They should specialize in the good that is “cheaper” for them to produce.
Benefits of Specialize
and Trade
65
International Trade
Su
gar
(to
ns)
Su
gar
(to
ns)
45
40
35
30
25
20
15
10
5
0
30
25
20
15
10
5
0 5 10 15 20 25 30 5 10 15 20
Wheat (tons) Wheat (tons)
S W
0 30
1.5 29
3 28
4.5 27
6 26
7.5 25
9 24
10.5 23
12 22
13.5 21
15 20
16.5 19
18 18
19.5 17
S W
20 0
18.5 1
17 2
15.5 3
14 4
12.5 5
11 6
9.5 7
8 8
6.5 9
5 10
3.5 11
The US Specializes and
makes ONLY Wheat
Brazil Makes
ONLY Sugar
66
USA Brazil
Trade: 1 Wheat for 1.5 Sugar
TRADE SHIFTS THE PPC! S
ug
ar
(to
ns
)
Su
gar
(to
ns)
45
40
35
30
25
20
15
10
5
0
30
25
20
15
10
5
0 5 10 15 20 25 30 5 10 15 20
AFTER TRADE
AFTER TRADE
Wheat (tons) Wheat (tons)
International Trade
67
USA Brazil
Su
gar
(to
ns)
Su
ga
r (t
on
s)
45
40
35
30
25
20
15
30
25
20
15
10
5 10 15 20 25 30 5 10 15 20 Wheat (tons) Wheat (tons)
USA
Brazil
Wheat Sugar
30 30
10 20
(1W costs 1S) (1S costs 1W)
(1W costs 2S) (1S costs 1/2W)
Which country has a comparative advantage in wheat?
1. Which country should EXPORT Sugar?
2. Which country should EXPORT Wheat?
3. Which country should IMPORT Wheat?
68
Output Questions:
OOO=
Output: Other goes Over
69
Input Questions
(The variable is resources
or time)
IOU=
Input: Other goes Under
70
Terms of Trade
71
Both countries can benefit from trade if they
each have relatively lower opportunity costs.
Terms of Trade- The agreed upon conditions
that would benefit both countries
Ex: Trade 1 ton of wheat for 1.5 tons of sugar
Kenya
India
Pineapples Radios
30 10
40 40
1. Who has an absolute advantage in Radios? 2. What is the cost of one radio for India? 3. What is the per unit opportunity cost for 1
pineapple for Kenya? 4. Who has a comparative advantage in
pineapples? 5. Who has a comparative advantage in radios? 6. Who should import pineapples? 7. Trading 1 radio for how many pineapples would
benefit both countries?
Kenya
India
Pineapples Radios
30 10
40 40
(1P costs 1/3R) (1R costs 3 P)
(1P costs 1R) (1R costs 1P)
Kenya wants Radios If the terms of trade for 1 radio is greater than 3 pineapples then Kenya is worse off and should make radios on their own. India wants Pineapples If the terms of trade for 1 radio is less than 1 pineapple then India is worse off and should make pineapples on their own.
What terms of trade benefit both countries?
Trading 1 radio for 2 pineapples will benefit both If Kenya produces radios by themselves, they give up 3 Pineapples for each radio. If they can trade 2 pineapples for each radio they are better off. If India produces pineapples by themselves, they give up 1 pineapple for one radio. If they can get 2 pineapples for one radio they are better off.
The countries trade at a lower opportunity cost than if they made the products themselves!
Kenya
India
Pineapples Radios
30 10
40 40
(1P costs 1/3R) (1R costs 3 P)
(1P costs 1R) (1R costs 1P)
Comparative Advantage Practice Create a chart for each of the following problems. •First- Identify if it is a output or input question
•Second-Identify who has the ABSOLUTE ADVANTAGE
•Third-Identify who has a COMPARATIVE ADVANTAGE
•Fourth- Identify how they should specialize
1. Sara gives 2 haircuts or 1 perm and hour. Megan gives 3 haircuts
or 2 perms per hour.
2. Justin fixes 4 flats or 8 brakes per day. Tim fixes 1 flats or 5
brakes per day.
3. Hannah takes 30 minutes to wash dishes and 1 hour to vacuum
the house. Kevin takes 15 minutes to wash dishes and 45 minutes to
vacuum.
4. Americans produce 50 computers or 50 TVs per hour. Chinese
produce 30 computers or 40 TVs per hour. 75
Scarcity Means There Is Not Enough For
Everyone
Government must step in to help allocate
(distribute) resources 76
Scarcity Bus Ride Scenario:
A group of 40 college students get on a bus to go
to a dance 30 miles away.
Shortly after leaving, the bus finds that it is too
heavy to go over a large hill
10 students need to get off the bus
You and your partner need to find 5 different
ways to decide who should get off the bus.
1. Are any of the solutions fair?
2. How are resources allocated in communism?
3. How are resources allocated in capitalism?
4. What role do prices play in capitalism? 77
Every society must answer three questions:
The Three Economic Questions 1. What goods and services should be
produced?
2. How should these goods and services be produced?
3. Who consumes these goods and services?
The way these questions are answered
determines the economic system
An economic system is the method used by a
society to produce and distribute goods and
services. 78
Economic Systems 1. Centrally-Planned
(Command) Economy
2. Free Market Economy
3. Mixed Economy
79
Centrally-Planned
Economies (aka Communism)
80
Centrally Planned Economies
In a centrally planned economy (communism)
the government…
1. owns all the resources.
2. answers the three economic questions
Examples: Cuba, North Korea, former Soviet Union, and China?
Why do centrally planned economies face problems of poor-quality goods, shortages,
and unhappy citizens? Little incentive to work harder and central
planners have a hard time predicting preferences 81
Irrational Soviet Production Soviet companies were not guided by prices or profit. Gov’t officials
determined output quotas based on quantitative measurements. Businesses were paid based on meeting these quotas.
1. Why did a business make desk lamps that were filled with lead that were almost too heavy to carry?
2. Why did light bulb producers only make tiny night light size bulbs?
3. Why did oil companies drill many shallow holes when they knew that oil deposits are usually found in deep holes that require
slower drilling? 4. Why did a construction superintendent order his workers to
remove bathtubs from the first floor and install them in the third floor while he slowly lead inspectors through apartment building.
5. Why did black market vendors sell burned out light bulbs?
82
Production quota based on weight
Production quota based number of bulbs produced
Production quota based number of feet drilled
Quota on # of apartments complete at inspection
Business got resources before the public so workers would steal good light bulbs from work and replace them with burnt out bulbs
Advantages and Disadvantages
1. Low unemployment-everyone has a job
2. Great Job Security-the government doesn’t go out of business
3. Equal incomes means no extremely poor people
4. Free Health Care
What is GOOD about
Communism? What is BAD about
Communism? 1. No incentive to work
harder 2. No incentive to
innovate or come up with good ideas
3. No Competition keeps quality of goods poor.
4. Corrupt leaders 5. Few individual
freedoms 83
Free Market System (aka Capitalism)
85
Characteristics of Free Market
1. Little government involvement in the economy.
(Laissez Faire = Let it be)
2. Individuals OWN resources and answer the
three economic questions.
3. The opportunity to make PROFIT gives people
INCENTIVE to produce quality items
efficiently.
4. Wide variety of goods available to consumers.
5. Competition and Self-Interest work together to
regulate the economy (keep prices down and
quality up). Reword for Communism 86
Example of Free Market Example of how the free market regulates itself:
If consumers want smartphones and only one
company is making them…
•Other businesses have the INCENTIVE to start
making smartphones to earn PROFIT.
•This leads to more COMPETITION….
•Which means lower prices, better quality, and
more product variety.
•We produce the goods and services that society
wants because “resources follow profits”.
The End Result: Most efficient production of the
goods that consumers want, produced at the lowest
prices and the highest quality. 87
Example of Central Planners Example of why communism failed:
If consumers want smartphones and only one
company is making them…
•Other businesses CANNOT start making
computers.
•There is NO COMPETITION….
•Which means higher prices, lower quality, and
less product variety.
•More phones will not be made until the
government decides to create a new factory.
The End Result: There is a shortage of goods that
consumers want, produced at the highest prices
and the lowest quality. 88
The Invisible Hand The concept that society’s goals will be met as
individuals seek their own self-interest.
Example: Society wants fuel efficient cars…
•Profit seeking producers will make more.
•Competition between firms results in low
prices, high quality, and greater efficiency.
•The government doesn’t need to get involved
since the needs of society are automatically
met.
Competition and self-interest act as an invisible
hand that regulates the free market. 89
Attacks Against Capitalism
90
91
1. Companies are greedy and do anything to screw over consumers!
• Companies have an incentive to satisfy the needs of consumers. If they don’t they will go out of business.
2. Capitalism causes companies to outsource US jobs overseas. America suffers because companies want more profit!
• How many of you lost your job to outsourcing? • How many of you benefit in the form of lower prices? 3. Capitalism only helps the rich. US companies enslave and
exploit third-world workers in sweatshops! • Sweatshop workers are not forced labor. They make the
decision to work there voluntarily. Why? • Although the working conditions are far below US
standards, working in a sweatshop is better that the alternative • Sweatshop wages in Vietnam, Honduras, and Nicaragua
are more than double the country’s average wage.
Attacks Against Capitalism
Sweatshops
92
Sweatshops Then
Sweatshops Now
Question: Who is to blame for
these people being so poor?
Answer: Low productivity.
If a country doesn’t produce very
much, it can’t afford to pay it’s
workers very much.
Why do these countries have
such low productivity?
Corrupt governments,
inadequate physical capital and
infrastructure, and
underdeveloped human capital.
What does foreign investment
bring to poor countries?
"My concern is not that there are too many sweatshops, but
that there are too few." -Jeffrey Sachs, Harvard University
Productivity Creates Wealth
93
3rd World Countries Developed Countries
Countries with free markets, property rights, and
The Rule of Law, have historically seen greater
economic growth because they are more productive
Index of Economic Freedom 93
Connection to the PPC
Communism in the
Long Run Free Markets in the
Long Run
Consumer goods
Ca
pit
al
Go
od
s CURRENT
CURVE
FUTURE
CURVE
Consumer goods C
ap
ita
l G
ood
s
FUTURE
CURVE
CURRENT
CURVE
Costa Rica Cuba
94
The difference between North and South Korea at night
North Korea's GDP is $13 Billion
South Korea's GDP is $1.6 Trillion 95
The Circular Flow
Model The Product Market-
•The “place” where goods and services
produced by businesses are sold to households.
The Resource (Factor) Market-
•The “place” where resources (land, labor,
capital, and entrepreneurship) are sold to
businesses. 96
97 Product Market
Resource Market
Businesses Individuals
SUPPLY DEMAND
DEMAND SUPPLY
98 Product Market
Resource Market
Businesses Individuals Government Public Goods Public Goods
$$$
$$$ Taxes Taxes
Transfer Payments Subsidies
Circular Flow Model Vocab Private Sector- Part of the economy that is run by
individuals and businesses
Public Sector- Part of the economy that is
controlled by the government
Factor Payments- Payment for the factors of
production, namely rent, wages, interest, and
profit
Transfer Payments- When the government
redistributes income (ex: welfare, social security)
Subsidies- Government payments to businesses
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Circular Flow Model Review
1. Do individuals supply or demand?
2. Do business supply or demand?
3. Who demands in the product market?
4. Who supplies in the product market?
100
Both, they demand products and supply
resources
Both, the supply products and demand resources
Individuals and the government
Businesses
Free Response
Questions When you do a FRQ don’t forget to R.O.L.L.:
READ the entire question first
ORAGANIZE your answer
LIST your answers like the question
LABEL everything
101
5 Problem Set Hints: 1. NEVER use your computer to create graphs
2. Answer in the same FORMAT as the
questions. (A, B, C i, C ii. etc.)
3. Fully EXPLAIN or give examples when
asked to do so. It is better to over explain.
4. Answer the ENTIRE question explicitly.
5. NEVER straight copy your book or my
notes. Use your own words and examples.
Take out your Problem Set
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