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Tests ???? 2006
Test on Units 4 & 5 – After the AP Test, Monday May 15. Your last textbook test!
10 point Bonus Homework for unit 4 due Friday May 5. All Homework for unit 4 after the AP Test, Monday May 15.
A week break of Wal-Mart and Daddy Day Care.Final two weeks the state of our current U.S. and
global economy and Freakonomics. Your Choice last essay to be scored as a test on
one of the last topics.
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The Demand for Resources
CHAPTER TWENTY-SEVEN
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Product MarketBurgers
P
Q
D
S
S
S
S
S
D
D
D
D
P
P
P
PD2
D2
D2
D2
D2
Factor MarketsCELL
Q Land
Q Entrepreneurship
Q Capital
Q LaborMarkets Move in Unison!
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Determinants of Resource Determinants of Resource Demand or Factor Demand(CELL)Demand or Factor Demand(CELL)
Changes in Product DemandChanges in Product Demand
Changes in ProductivityChanges in Productivity 1 - Quantities of Other Resources1 - Quantities of Other Resources 2 - Technological Progress2 - Technological Progress 3 - Quality of the Resource3 - Quality of the Resource
Prices of Other ResourcesPrices of Other Resources
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Quantity Quantity
Product MarketProduct Market Factor MarketFactor MarketCELLCELL
P
S
D
Supply & DemandSupply & DemandProduct and Factor MarketsProduct and Factor Markets
P
D
S
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Quantity Quantity
Product MarketProduct Market Factor MarketFactor Market
P
S
D
What if Product Demand FallsWhat if Product Demand FallsProduct and Factor MarketsProduct and Factor Markets
P
D
S
CELLCELL
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Quantity Quantity
Product MarketProduct Market Factor MarketFactor Market
P
S
D
What if Product Demand FallsWhat if Product Demand FallsProduct and Factor MarketsProduct and Factor Markets
P
D
S
CELLCELL
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Quantity Quantity
Product MarketProduct Market Factor MarketFactor Market
P
S
D
What if Demand FallsWhat if Demand FallsProduct and Factor MarketsProduct and Factor Markets
P
D
S
CELLCELL
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Quantity Quantity
Product MarketProduct Market Factor MarketFactor Market
P
S
D
Supply & DemandSupply & DemandProduct and Factor MarketsProduct and Factor Markets
P
D
S
CELLCELL
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Quantity Quantity
Product MarketProduct Market Factor MarketFactor Market
P
S
D
What if Factor Demand Increased?What if Factor Demand Increased?Product and Factor MarketsProduct and Factor Markets
P
D
S
CELLCELL
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Quantity Quantity
Product MarketProduct Market Factor MarketFactor Market
P
S
D
What if Factor Demand Increased?What if Factor Demand Increased?Product and Factor MarketsProduct and Factor Markets
P
D
S
CELLCELL
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Quantity Quantity
Product MarketProduct Market Factor MarketFactor Market
P
S
D
P
D
S
Failure to Know Difference BetweenFailure to Know Difference BetweenProduct and Factor Markets Major Miss for the AP ExamProduct and Factor Markets Major Miss for the AP Exam
CELLCELL
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Marginal ProductivityMarginal ProductivityTheory of Resource DemandTheory of Resource DemandResource Demand as a Derived DemandResource Demand as a Derived DemandMarginal Product Marginal Product (MPP=^TP/^Q)(MPP=^TP/^Q)Marginal Revenue ProductMarginal Revenue Product (MRP) (MRP)
Productivity Productivity (MRP=MPP*P(MRP=MPP*Poo))Product Price Product Price (MRP=^TR/^Q)(MRP=^TR/^Q)
Marginal Resource Cost Marginal Resource Cost (MRC) – in a purely (MRC) – in a purely competitive resource market MRC=Pricecompetitive resource market MRC=Price
Rule for Employing a Rule for Employing a Single Single Resource:Resource:
MRP = MRCMRP = MRC
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Optimum Combination of ResourcesOptimum Combination of ResourcesRules for multiple inputs!Rules for multiple inputs!
Least-Cost Combo Rule Least-Cost Combo Rule
Profit-Maximizing CombinationProfit-Maximizing Combination
MPP of LaborMPP of Labor MPP of CapitalMPP of Capital
MRC of LaborMRC of Labor MRC of CapitalMRC of Capital
MRPMRPLL
MRCMRCLL
MRPMRPCC
MRCMRCCC11
For nonmath people: if MRP = MRC then MRP/MRC = 1
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Ha Ha Ha – Factor Markets are Fun!
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1
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TheProduct Market
HouseholdsIndividual FirmsSignals
D
S
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Product Market HouseholdIndividual Firm
D
S
s
d
d = MR
s = MC
Q*
P*
q* q*
P* P*
The Product Market signals both Households and Individual Firmthe price of products. The signals indicate P* to both.Based on its cost of producing one more firms determine how much.Based on their demand consumer determine how many.
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Factor MarketLabor
Individual FirmsWorkers
D
S
MRC
MRP
d = MSB
s = MSC
Q*
P*
q* q*
P* P*
The Factor Market signals both Workers and Individual Firmsthe price of labor & the wage of labor. The signals indicate P* to both.Based on its revenue/worker(mrp) vs. its costs(mrc) firms determine how many workers to hire (mrp=mrc). Based on their Marginal Benefit vs. Marginal Cost workers determine whether or not they will work for this wage (msc=msb).
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Wag
e R
ate
(do
llar
s)
Quantity of Labor Quantity of LaborIndividual FirmIndividual Firm MarketMarket
S = MRC
d = mrp
Wc
D
S
D = MRP
( mrp’s)
Wc
(1000)(1000)
($6.85)($6.85)
Supply & Demand: Supply & Demand: Labor in a Competitive Firm and Market
TargetWorkers
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Wag
e R
ate
(do
llar
s)
Quantity of Labor Quantity of LaborIndividual FirmIndividual Firm MarketMarket
S = MRC
d = mrp
Wc
D
S
D = MRP
( mrp’s)
Wc
(1000)(1000)
($6)($6)
Supply & Demand: Supply & Demand: Labor in a Competitive Firm and Market
Marginal ResourceCost (MRC) will be
constant and equal toresource price(the wage rate)
Marginal ResourceCost (MRC) will be
constant and equal toresource price(the wage rate)
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Labor Market TheoryThe Real World Will Get You!
• Human Capital– Education = Income
• Sorting Mechanism– Hoops
• Radical View– Rich Dad Poor Dad
• Dual Labor Market– Good Job v Bad Job Market
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3,500,000• Fast food workers lead
the nation in minimum wage jobs
• McDonalds Corp #1 at hiring minimum wage workers in the world
• How many minimum wage workers does McDonalds own?
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1 - Ability Differences1 - Ability Differences2 - Education and Training: 2 - Education and Training: Human Capital & Sorting Mechanism TheoriesHuman Capital & Sorting Mechanism Theories
3 - Discrimination3 - Discrimination4 - Tastes and Risks4 - Tastes and Risks5 - Unequal Distribution of Wealth5 - Unequal Distribution of Wealth
Radical TheoryRadical Theory 6 - Market Power6 - Market Power7 - Luck, Connections, and Misfortune7 - Luck, Connections, and Misfortune
Good Job, Bad Job Market Good Job, Bad Job Market
EQUALITY-EFFICIENCY TRADEOFFEQUALITY-EFFICIENCY TRADEOFF
CAUSES OF INCOME INEQUALITY-Unit VCAUSES OF INCOME INEQUALITY-Unit V
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Wag
e R
ate
(do
llar
s)
MRPDD
S=MRC
Wm
Quantity of Labor
MRPDD
MRC
Wc
Qm Qc
The MRC of aThe MRC of aMonopsonist isMonopsonist is
Pulled Above thePulled Above theSupplySupply
Monopsonistic Labor MarketMonopsonistic Labor Market
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Wag
e R
ate
(do
llar
s)
MRP
S
Quantity of Labor
MRPMRC
MRPMRP = MRC = MRC Profit MaxProfit Max
S(MRC)=S(MRC)=DD(MRP)DD(MRP)
Wm
Qm
QQm m units ofunits of
labor hiredlabor hiredless than in aless than in a
Competitive MarketCompetitive Market
Monopsonistic Labor MarketMonopsonistic Labor Market
Price paid for resources less
than in a Competitive
Market
Wc
Qc
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Wg
Qm
Wag
e R
ate
(do
llar
s)
D
Quantity of Labor
Monopsonist & Minimum wage…
Wc
Qc
S
Wm
Qg
MRC
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Wu
Qu
Wag
e R
ate
(do
llar
s)
D1
S
Quantity of Labor
Wc
Qc
D2
...by increasing...by increasingproduct demandproduct demand...by increasing...by increasingproductivityproductivity...by increasing...by increasingthe price ofthe price ofsubstitutessubstitutes
...by increasing...by increasingproduct demandproduct demand...by increasing...by increasingproductivityproductivity...by increasing...by increasingthe price ofthe price ofsubstitutessubstitutes
Goodwill, Buy AmericanGoodwill, Buy AmericanDemand-Enhancement Model
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Wu
Qu
Wag
e R
ate
(do
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s)
D
S1
Quantity of Labor
Wc
Qc
...restrictive...restrictive membershipmembership policiespolicies...occupational...occupational licensinglicensingDoctors, LawyersDoctors, LawyersTeachers….Teachers….
...restrictive...restrictive membershipmembership policiespolicies...occupational...occupational licensinglicensingDoctors, LawyersDoctors, LawyersTeachers….Teachers….
S2
Occupational Licensing Occupational LicensingExclusive or Craft Union Model
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Wu
Qu
Wag
e R
ate
(do
llar
s)
D
Quantity of Labor
Wc
Qc
...by organizing virtually all workers and thereby control of the supply curve for labor
...by organizing virtually all workers and thereby control of the supply curve for labor
S
Close Shop ModelClose Shop ModelInclusive Unionism
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ECONOMIC RENTECONOMIC RENTNote: Note: Fixed Total SupplyFixed Total Supply
Perfectly Inelastic SupplyPerfectly Inelastic Supply
means...means...
Demand Determines Price!Demand Determines Price!
therefore...therefore...
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Lan
d R
ent
(do
llar
s)
Acres of Land
Changes in the demand for land...Determination of Land RentDetermination of Land Rent
0Q
Inelastic Supply...Inelastic Supply...
Copyright McGraw-Hill, Inc., 1999
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Lan
d R
ent
(do
llar
s)
Acres of Land
S
S0
Q
Inelastic Supply...Inelastic Supply...combines withcombines withdemand...demand...
Determination of Land RentDetermination of Land RentChanges in the demand for land...
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Lan
d R
ent
(do
llar
s)
Acres of Land
R1
S
S
D1
0Q
Inelastic Supply...Inelastic Supply...combines withcombines withdemand... demand... totodetermine determine RENTRENT
Determination of Land RentDetermination of Land RentChanges in the demand for land...
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Lan
d R
ent
(do
llar
s)
Acres of Land
R1
S
S
D1
0Q
If demand decreases...If demand decreases...
Determination of Land RentDetermination of Land RentChanges in the demand for land...
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Lan
d R
ent
(do
llar
s)
Acres of Land
R1
S
S
D2
D1R2
0Q
If demand decreases...If demand decreases...Rent decreases. Rent decreases.
Determination of Land RentDetermination of Land RentChanges in the demand for land...
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Lan
d R
ent
(do
llar
s)
D3
Acres of Land
R1
S
S
D2
D1R2
R3
0Q
If demand decreases...If demand decreases...Rent decreases. Rent decreases. ...and decreases...and decreases
Determination of Land RentDetermination of Land RentChanges in the demand for land...
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Lan
d R
ent
(do
llar
s)
D3
Acres of Land
R1
S
SD4
D2
D1R2
R3
0Q
If demand decreases...If demand decreases...Rent decreases. Rent decreases. ...and decreases...and decreases ...and decreases...and decreases
Determination of Land RentDetermination of Land RentChanges in the demand for land...
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Bre
tt F
avre
’s S
alar
y
All Pro Quarter Backs with100+ Games Started without a miss
$100,000,000
S
1
D
0Q
PerfectlyPerfectlyInelastic Supply...Inelastic Supply...combines withcombines withdemand... demand... totodetermine determine Salary!Salary!
Economic Rent & Stardom?Economic Rent & Stardom?Changes in the demand for a fixed resource...
$200,000 Would play for $200,000for love of the game!
Pure Economic
Rent$99,800,000!
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Factor Market Theory
• Land earns Rent, or Economic Rent
• Labor earns Wages or Salary
• Capital earns Interest
• Entrepreneurship earns Economic Profit
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Interest Rate and theInterest Rate and theRole of the Interest Rate: Role of the Interest Rate:
Interest & Total Output: RGDPInterest & Total Output: RGDP Interest & Capital InvestmentInterest & Capital Investment Interest & R&D InvestmentInterest & R&D Investment Nominal Interest Rates vs.Nominal Interest Rates vs. Real Interest RatesReal Interest Rates
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Inte
rest
Rat
e i,
(p
erce
nt)
Quantity of Loanable Funds
Loanable Funds Theory of InterestLoanable Funds Theory of Interest
8%
MD
M1
MS
Nominal i = Real i + Rate of Inflation
4% Inflation+4% Real Interest Rate 8% Nominal Interest Rate
![Page 49: Tests ???? 2006 Test on Units 4 & 5 – After the AP Test, Monday May 15. Your last textbook test! 10 point Bonus Homework for unit 4 due Friday May 5](https://reader035.vdocuments.mx/reader035/viewer/2022062315/56649ec95503460f94bd6571/html5/thumbnails/49.jpg)
The Money MarketThe Money Market
Ra
te o
f in
tere
st,
i (p
erce
nt)
Amount of money demanded(billions of dollars)
10
7.5
5
2.5
0
MS
MD
i
0 50 100 150 200 250 300
![Page 50: Tests ???? 2006 Test on Units 4 & 5 – After the AP Test, Monday May 15. Your last textbook test! 10 point Bonus Homework for unit 4 due Friday May 5](https://reader035.vdocuments.mx/reader035/viewer/2022062315/56649ec95503460f94bd6571/html5/thumbnails/50.jpg)
Ra
te o
f in
tere
st,
i (p
erce
nt)
Amount of money demanded(billions of dollars)
0 50 100 150 200 250 300
10
7.5
5
2.5
0
Dm
ie
SmSm1
Any MicroOr any Macro AP
Question concerningInterest Rate uses this
Graph!!!!
Any MicroOr any Macro AP
Question concerningInterest Rate uses this
Graph!!!!
The Money MarketThe Money Market
![Page 51: Tests ???? 2006 Test on Units 4 & 5 – After the AP Test, Monday May 15. Your last textbook test! 10 point Bonus Homework for unit 4 due Friday May 5](https://reader035.vdocuments.mx/reader035/viewer/2022062315/56649ec95503460f94bd6571/html5/thumbnails/51.jpg)
The Money MarketThe Money Market
Ra
te o
f in
tere
st,
i (p
erce
nt)
Amount of money demanded(billions of dollars)
10
7.5
5
2.5
0
MS – Fed controls MSOMO, RRR, DR, FFR
MD – FiscalPolicy: G,T,Surplus, Deficit
i
0 50 100 150 200 250 300
![Page 52: Tests ???? 2006 Test on Units 4 & 5 – After the AP Test, Monday May 15. Your last textbook test! 10 point Bonus Homework for unit 4 due Friday May 5](https://reader035.vdocuments.mx/reader035/viewer/2022062315/56649ec95503460f94bd6571/html5/thumbnails/52.jpg)
Transmission Graphs
![Page 53: Tests ???? 2006 Test on Units 4 & 5 – After the AP Test, Monday May 15. Your last textbook test! 10 point Bonus Homework for unit 4 due Friday May 5](https://reader035.vdocuments.mx/reader035/viewer/2022062315/56649ec95503460f94bd6571/html5/thumbnails/53.jpg)
Pri
ce le
vel
Real domestic output, GDP
Dm
InvestmentDemand
Rea
l rat
e of
inte
rest
, i
10
8
6
0
10
8
6
0Quantity of money demanded and supplied Amount of planned
investment, I
Monetary Policy and Equilibrium GDPMonetary Policy and Equilibrium GDPSm1
AS
AD1
P1
RiR
MEI – Marginal Efficiency of InvestmentAs interest falls more Investment becomesPossible and Profitable!
MEI
![Page 54: Tests ???? 2006 Test on Units 4 & 5 – After the AP Test, Monday May 15. Your last textbook test! 10 point Bonus Homework for unit 4 due Friday May 5](https://reader035.vdocuments.mx/reader035/viewer/2022062315/56649ec95503460f94bd6571/html5/thumbnails/54.jpg)
Real domestic output, GDP
Quantity of money demanded and supplied Amount of planned investment, I
Dm
InvestmentDemand
10
8
6
0
10
8
6
0
Monetary Policy and Equilibrium GDPMonetary Policy and Equilibrium GDPSm1
AS
AD1
If the money supplyincreases tostimulate theeconomy....P
rice
leve
lR
eal r
ate
of in
tere
st, i
P1
RiR
MEI
![Page 55: Tests ???? 2006 Test on Units 4 & 5 – After the AP Test, Monday May 15. Your last textbook test! 10 point Bonus Homework for unit 4 due Friday May 5](https://reader035.vdocuments.mx/reader035/viewer/2022062315/56649ec95503460f94bd6571/html5/thumbnails/55.jpg)
Dm
InvestmentDemand
10
8
6
0
10
8
6
0
Monetary Policy and Equilibrium GDPMonetary Policy and Equilibrium GDPSm1
AS
Sm2
AD1 AD2
Pri
ce le
vel
Rea
l rat
e of
inte
rest
, i
Real domestic output, GDP
Quantity of money demanded and supplied Amount of planned investment, I
P1
P2
RiR
MEI
![Page 56: Tests ???? 2006 Test on Units 4 & 5 – After the AP Test, Monday May 15. Your last textbook test! 10 point Bonus Homework for unit 4 due Friday May 5](https://reader035.vdocuments.mx/reader035/viewer/2022062315/56649ec95503460f94bd6571/html5/thumbnails/56.jpg)
Real domestic output, GDP
Quantity of money demanded and supplied Amount of planned investment, I
Dm
InvestmentDemand
10
8
6
0
10
8
6
0
Monetary Policy and Equilibrium GDPMonetary Policy and Equilibrium GDPSm1
AS
Sm2
AD1 AD2
If the moneysupply increases
again.... Pri
ce le
vel
Rea
l rat
e of
inte
rest
, i
P1
P2
RiR
MEI
![Page 57: Tests ???? 2006 Test on Units 4 & 5 – After the AP Test, Monday May 15. Your last textbook test! 10 point Bonus Homework for unit 4 due Friday May 5](https://reader035.vdocuments.mx/reader035/viewer/2022062315/56649ec95503460f94bd6571/html5/thumbnails/57.jpg)
Dm
InvestmentDemand
10
8
6
0
10
8
6
0
Monetary Policy and Equilibrium GDPMonetary Policy and Equilibrium GDP
AD1 AD2 AD3
Sm1
AS
P1
Sm2
P2
Sm3
P3
Pri
ce le
vel
Rea
l rat
e of
inte
rest
, i
Real domestic output, GDP
Quantity of money demanded and supplied Amount of planned investment, I
RiR
MEI
Long Run Effects:1. Increased planned investment will lead to increased AS2. Canceling effect: AD up, MD up, i up, and I down, = AD down3. i down = international $ down, PL up = X down
![Page 58: Tests ???? 2006 Test on Units 4 & 5 – After the AP Test, Monday May 15. Your last textbook test! 10 point Bonus Homework for unit 4 due Friday May 5](https://reader035.vdocuments.mx/reader035/viewer/2022062315/56649ec95503460f94bd6571/html5/thumbnails/58.jpg)
Pri
ce le
vel
Real domestic output, GDP
AD1 AD2
Fiscal Policy and Equilibrium GDPFiscal Policy and Equilibrium GDP
Rea
l rat
e of
inte
rest
, i
10
8
6
0
Sm1
Quantity of money demanded and supplied
Dm1
Dm2
Amount of planned investment, I
RiR
10
8
6
0
MEIPI1PI2
Long Run Effects:1. Decreased planned investment will lead to decreased AS2. Canceling effect: I down, AD down, MD down, and i down, = AD up3. i up = international $ up, PL down = X up
![Page 59: Tests ???? 2006 Test on Units 4 & 5 – After the AP Test, Monday May 15. Your last textbook test! 10 point Bonus Homework for unit 4 due Friday May 5](https://reader035.vdocuments.mx/reader035/viewer/2022062315/56649ec95503460f94bd6571/html5/thumbnails/59.jpg)
SCARCE RESOURCESSCARCE RESOURCES
PROPERTY RESOURCESPROPERTY RESOURCES
LANDLAND
CAPITALCAPITAL
HUMAN RESOURCESHUMAN RESOURCES
LABORLABOR
What’s missing????
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PROPERTY RESOURCESPROPERTY RESOURCES
LANDLAND
CAPITALCAPITAL
HUMAN RESOURCESHUMAN RESOURCES
LABORLABOR
ENTREPRENEURIAL ABILITYENTREPRENEURIAL ABILITY
SCARCE RESOURCESSCARCE RESOURCES
![Page 61: Tests ???? 2006 Test on Units 4 & 5 – After the AP Test, Monday May 15. Your last textbook test! 10 point Bonus Homework for unit 4 due Friday May 5](https://reader035.vdocuments.mx/reader035/viewer/2022062315/56649ec95503460f94bd6571/html5/thumbnails/61.jpg)
ENTREPRENEURIAL ABILITYENTREPRENEURIAL ABILITY
TAKES THE INITIATIVETAKES THE INITIATIVE
![Page 62: Tests ???? 2006 Test on Units 4 & 5 – After the AP Test, Monday May 15. Your last textbook test! 10 point Bonus Homework for unit 4 due Friday May 5](https://reader035.vdocuments.mx/reader035/viewer/2022062315/56649ec95503460f94bd6571/html5/thumbnails/62.jpg)
ENTREPRENEURIAL ABILITYENTREPRENEURIAL ABILITY
TAKES THE INITIATIVETAKES THE INITIATIVE
MAKES POLICY DECISIONS MAKES POLICY DECISIONS
![Page 63: Tests ???? 2006 Test on Units 4 & 5 – After the AP Test, Monday May 15. Your last textbook test! 10 point Bonus Homework for unit 4 due Friday May 5](https://reader035.vdocuments.mx/reader035/viewer/2022062315/56649ec95503460f94bd6571/html5/thumbnails/63.jpg)
ENTREPRENEURIAL ABILITYENTREPRENEURIAL ABILITY
TAKES THE INITIATIVETAKES THE INITIATIVE
MAKES POLICY DECISIONS MAKES POLICY DECISIONS
SOURCE OF INNOVATIONSOURCE OF INNOVATION
![Page 64: Tests ???? 2006 Test on Units 4 & 5 – After the AP Test, Monday May 15. Your last textbook test! 10 point Bonus Homework for unit 4 due Friday May 5](https://reader035.vdocuments.mx/reader035/viewer/2022062315/56649ec95503460f94bd6571/html5/thumbnails/64.jpg)
ENTREPRENEURIAL ABILITYENTREPRENEURIAL ABILITY
TAKES THE INITIATIVETAKES THE INITIATIVE
MAKES POLICY DECISIONS MAKES POLICY DECISIONS
SOURCE OF INNOVATIONSOURCE OF INNOVATION
THE RISK BEARERTHE RISK BEARER
![Page 65: Tests ???? 2006 Test on Units 4 & 5 – After the AP Test, Monday May 15. Your last textbook test! 10 point Bonus Homework for unit 4 due Friday May 5](https://reader035.vdocuments.mx/reader035/viewer/2022062315/56649ec95503460f94bd6571/html5/thumbnails/65.jpg)
RESOURCE PAYMENTSRESOURCE PAYMENTS
PROPERTY RESOURCESPROPERTY RESOURCESLANDLAND
CAPITALCAPITAL
HUMAN RESOURCESHUMAN RESOURCESLABORLABOR
RENTRENT
INTERESTINTEREST
WAGESWAGES
ENTREPRENEURENTREPRENEUR PROFIT &PROFIT &LOSSLOSS