econ ch3 economic factors
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ChapterChapter
EconomicEconomic
FactorsFactors3
Chapter ObjectivesStudents will learn: How a market economy works and what its
major characteristics are. What the circular flow model is and why it
is important. What can increase the amount of goods
and services that an economy produces. What the production possibilities curve is
and what information it conveys. What specialization and trade are and the
role they play in the market economy system in creating market efficiency.
How a Market Economy Works
– A change in the
system affects the
other parts– Producers: people
who transform natural
resources, human
resources, and capital resources into goods and services.
– Entrepreneurship: start new businesses, new products, new services, and manage them.
Characteristics of a Market Economy
1. Freedom
2. Trade
3. Private Property
4. Profit
5. Competition
FREEDOM
TRADE
Producers & Consumers– consumer must believe
what they buy is worth the price
– seller must profit
PRIVATE PROPERTY• The right to own stuff
• Ownership makes risk worthwhile
PROFIT
• better off after buying
or selling
• risk in hopes of some wealth
• Wealth=ownership
• incentive/motivation
COMPETITION• freedom
• encourages innovation
and new ideas
• improves quality
• reduces price
• encourages efficiency– efficient: make the most of their resources,
make as large a profit as possible
Circular Flow of Economic Activity
• Circular flow model: shows how a market is organized
– Production– Consumption– flow of money
• Factor Market– wages for workers– natural resources– tools, buildings, capital
• Product Market– consumers buy goods and services– businesses use profits to purchase in factor markets
Production Possibilities
• Market economy based on idea that best way to respond to scarcity is by making the most of every resource
• Encourages efficiency
Examining Production Possibilities
• Production possibilities curve: shows limits of production
• What’s possible?
• PP at any moment is limited not fixed.
• Variables can influence/change
Economic Growth
expansion of production possibilities
• Trade-offs at national level
• Opportunity Cost at national level
Capital Accumulation
• Expansion of production possibilities
– Accumulation=collect, increase, build up
– Capital=tools, machines– Infrastructure=roads,
airports, factories, sewers, mass transit, and other public goods
Productivity: – amount of goods/services worker can
produce in a certain amount of time
– Research & Development
“What increases productivity for you?”
Specialization & Trade
• Some people are better at some things than others
• Concentrating on
fewer tasks allows
more to be done
with fewer resources
Specialization
“focusing on making few goods
or services”– Opposite=self-sufficient– Encourages the need for trade– Absolute advantage=ability to produce a
product or service using fewer resources than other producers require
Specialization & Comparative Advantage
• Specialization lets individuals focus on what they do best
• Why specialize? Comparative advantage– Comp adv.=relatively low opportunity cost– In comparison to others
• Law of comparative advantage=those with lower opportunity cost should specialize in that product or service even if they do not have an absolute advantage
• Specializing expands production possibilities
US Productivity in Manufacturing
Interdependence• Important part of
modern life
• Person to person,
business to business,
state to state, nation to nation
• Negative effect of outside events?
• Gains in productivity offset losses
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