The Circular Flow of Economics

Resources, goods and services and money flow continuously among households, businesses and the government in the U.S. economy.

  • Individual households own the resources used in production; sell the resources and use the income to purchase products.
  • Businesses (producers) buy resources used in production; sell the resources and use the income to purchase products.
  • Governments use tax revenue from individuals and businesses to provide public goods and services.

Production, Consumption & Distribution

Four Questions All Economic Systems Must Address
1. WHAT is produced? / Production
/ Goods and services must satisfy the consumers wants and desires
2. HOW should these goods be produced? / Factors of Production
Capital
Entrepreneurship
Land
Labor / Combine the factors of production to make or produce the goods and services
3. For WHOM are the goods and services produced? / Distribution

/ Getting the goods and services from producer to consumer
4. HOW MANY goods and services should be produced? / Consumption / Make enough to have a large profit and still have consumer demand. How many is determined by supply and demand.

Economics

Supply and Demand

Resources, Scarcity & Opportunity Cost

Good
/ Anything that can be grown or manufactured (made)
  • Food
  • Clothes
  • Cars

Service
/ Something a person does for someone else in exchange for money or value.
  • doctor
  • hairdresser
  • waiter

Resources
/ Natural
Human
Capital
Combine to make goods and services
Our Basic Economic Problem:
People have
Unlimited Wants
Food, clothing, shelter, schools, hospitals, cars, transportation / But Resources are
Limited
Land, soil, minerals, fuels, people, money, technology
SCARCITY
The inability to satisfy all wants at the same time; the NEEDS are greater than the RESOURCES
Since resources are LIMITED consumers and producers must make CHOICES
CHOICE: selecting from a set of alternatives / OPPORTUNITY COST: what is given up when the choice is made.
Scarcity forces us to choose which needs and wants to satisfy with available resources. Scarcity affects decisions concerning what and how much to produce, how goods and services will be produced and who will get what is produced.
Production
(Sellers) / Combining resources to make goods and services. Available resources and consumer preference determine what is produced
Consumption
(Buyers) / Using goods and services
Consumer preference and price determine what is purchased.

Challenges in a Free Market Vocabulary Terms

Economic Proposition / In English / Lesson for Life
Scarcity / You can't have everything you want. / Acceptance of scarcity will help you make more reasoned choices.
Alternatives / Different options from which you can choose. / There are many different ways to allocate resources and to solve problems.
Choice / Because you can't have everything you want, you have to make choices from a list of alternatives. / When policy-makers decide on a particular resource allocation, recognize that a choice had to be made due to scarcity. You may not like the alternative chosen, you may question the choice, but the villain is scarcity.
Trade-offs / Choices involve giving up something to get something. All choices have consequences, both positive and negative. / You are responsible for the consequences of your choices. Since you make choices, you can't be a victim.
Opportunity Cost / What is given up when a choice is made. / All choices have opportunity costs. A good idea is only a good idea if its value is greater than the value of its opportunity cost. Voters must always identify the opportunity cost of a particular policy.

Economic Systems

The type of economy a country has is based on the amount of government involvement in economic decisions.

Command Economy
  • The central government makes decisions and determines how resources will be used.
  • The central government owns property and resources.
  • Businesses are not run for profit.
  • No competition
  • Lack of consumer choice
  • The government sets the prices of goods and services.
China, North Korea, Cuba
Free Market Economy
  • Also known as capitalism or free enterprise
  • Private ownership of property and resources (owned by individuals)
  • Individuals and businesses make profits
  • Individuals and businesses compete
  • Economic decisions are made by supply and demand
  • Profit is a motivator for productivity
  • No government involvement
  • Consumer sovereignty: buyers determine what is produced

Mixed Economy
  • Most common type of economic system
  • Government and individuals share the decision making process
  • Individuals and businesses make decisions for the private sector
  • Individuals own the means of production
  • Government makes plans for the public sector
  • Government guides and regulates production of goods and services offered.
  • A greater government role than in a free market economy
  • Most effective economy for providing goods and services
  • U.S. and most Western European countries are mixed economies.

Who owns the resources and how are they allocated? / Who makes the decisions about what to make and sell? / Technology / How are prices determined?
Free Market Economy / Resources own privately; allocated according to price / Consumer and producers / Advanced / Supply and demand
Mixed Economy / Private individuals and the government / Consumers and producers for the private sector; government for the public sector / Advanced / Competition or set by government
Command Economy / Central government owns and allocates / Central Government / Advanced or developing / Set by government

Factors of Production

Factors of Production
Anything that goes into the making of a good or service
Capital / / tools
machinery
money
technology
Entrepreneur / / Business owner and risk taker combines the factors of production
Land / / Natural resources
Labor / / Workers and their time and energy

Business Organizations

The 15 million businesses in the U.S. fall into three categories: sole proprietorships, owned by a single individual, partnerships, with more than one owner sharing the risks and profits and corporations, owned by their stockholders.

Sole Proprietorship / Partnership / Corporation
1 owner / More than one owner (2+) / Owned by stockholders
  • The owner takes all the risks
  • Supplies capital, hires help, pays taxes
  • The owner makes all the profits
  • The owner is solely responsible for losses
b /
  • Risks are shared amongst the owners
  • Profits are shared amongst the owners
  • Often more successful than sole proprietorships
  • Responsibilities are shared
/
  • Authorized to act as a legal person regardless of the number of owners
  • Owners share the profits
  • Liability is limited to investment (you can only loose as much as you put in)
  • Raise money by selling stocks
  • No one is responsible for corporation’s debt if it fails

Sole proprietorships / Partnerships / Corporations
Advantages / Advantages / Advantages
Disadvantages / Disadvantages / Disadvantages

The U.S. Economy

The U.S. Economy is a MIXED economy where individuals, businesses and the government make economic decisions.

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