Circular Flow Model

Taco Bell just hired you to assemble tacos.

Market: Factor; Flow: Households provide FOP

Taco Bell gives you a paycheck.

Market: Factor; Flow: Firms pay for labor

Your concert tickets arrive.

Market: Product; Flow: firms provide g/s

You buy two tickets online for a concert.

Market: Product; Flow: Households pay for g/s

In which market are households buyers?

Product Market

In which market are households sellers?

Factor Market

In which market are firms buyers?

Factor Market

In which market are firms sellers?

Product Market

In the Product Market, Households:

pay for goods and services (monetary exchange)

In the Product Market, Firms:

provide goods and services (physical exchange)

In the Factor Market, Households:

provide FOP (physical exchange)

In the Factor Market, Firms:

pay households for FOPs (monetary)

Land

“gifts of nature” naturally occurring things in and on the earth that are used to make goods/services (ex. wheat used to produce flour, which goes into cupcakes)

Labor

“human resources” people who work to produce goods/services (ex. effort used to mix batter and bake cakes)

Capital

goods that are produced and used to make other goods/services (ex. oven used to produce cupcakes)

Money flows:

clockwise

Products flow:

counter-clockwise

Due to Scarcity, economists have to answer three Key Economic Questions, what are they?

-”What should we make?”

-”How should we make it?”

-”Who gets it”

Traditional Economy

Economic decisions are based on custom and historical precedent.

Command (centralized) economies

government planning groups make the basic economic decisions

Market Economy

economic decisions are guided by changes in price that occur as buyers and sellers interact in the marketplace

Positive Statements

(how the world works) objective and fact-based, measured against tangible evidence

Normative Statements

subjective and value-based often influenced by personal experience

PACED Model (P)

What Problem is the government trying to solve?

PACED Model (A)

What Alternatives do they have?

PACED Model (C)

What Criteria should they consider?

PACED Model (E)

How should they Evaluate their alternatives?

PACED Model (D)

What should they Decide?

Trade-offs

The cost of something is whatever you give up for that thing

Opportunity Costs

The next best alternative you give up

IRDL

Increase Right, Decrease Left

Change in the Quantity Demanded (graph movements)

a change in the price of a good is illustrated by a movement along the demand curve.

Change in Demand (graph movements)

a shift in the demand curve (new line) illustrates an increase/decrease in demand for that good at every price.

Substitutes

a good/service which can replace another good/service

Complements

a good/service used with another good/service

Four determinants of productivity

-Physical Capital (Tools/equipment)

-Human Capital (Knowledge/skills)

-Natural Resources (gifts of nature)

-Technological knowledge (society’s understanding of production)

Quantity Demand

the amount of a good/sevice consumers are willing and able to buy at a specific price

Demand

the amount of goods/services consumers are willing and able to buy at every available price

Absolute advantage

the ability to produce more with fewer/ the same resources than others

Comparative advantage

the fundamental reason or trade, the ability to produce at a lower opportunity cost than others

The Law of Demand

As price rises, quantity demanded will fall

Change in Demand occurs when…

-change in consumer tastes
-change in consumer incomes

-change in the number of consumers in the market

-a change in the price of a substitute good

-a change in the price of a complementary good

-a change in consumer’s price expectations

Demand only changes when….

there’s a change in ANOTHER product

Only a change in PRICE can change the

Quantity Demanded