circular flow & business cycle how the u.s. economy works ap macroeconomics
TRANSCRIPT
Circular Flow & Business Cycle
How the U.S. Economy works
AP Macroeconomics
Economic Models
• Economists use models to simplify our world– used for economic analysis of “real world”
– Based on various assumptions
• The 2 most basic economic models are:– Circular Flow Diagram– Production Possibilities Frontier (PPF)
2 Sides of a Market Economy
• Consumers decide what to BUY!
• Producers decide what to SELL (MAKE)
HOUSEHOLDS
FIRMS
Demand Curve
Supply Curve
5 Factors of Production• Resources used to make goods & services
1) Land- all basic natural resources2) Labor- human work/labor3) Physical Capital- previously produced goods4) Human Capital education, skills, etc…5) Entrepreneurship- managerial ability & risk taking
To open a coffee shop:
Land = Beans, store, etc…
Labor = worker Physical Capital =Coffee Machine
Human Capital = Skills of workers
Entrepreneurship- = Skills of owners
where any good or service is sold
Product & Factor Markets
Product Market:
Factor Market: where factors of production are exchanged
Consumers use product market
Producers use factor market
Spending
Goods andservicesbought
Revenue
Goods& servicessold
Labor, land,capital & entrepreneurship
Income
= Flow of inputs and outputs
= Flow of dollars
Factors ofproduction
Wages, rent,and profit
HOUSEHOLDS
FACTOR MARKET
PRODUCT MARKET
Rent is paid for LandWages is paid for LaborProfit is paid to Entrepreneurs
FIRMS
•The circular flow describes how goods, services and money flow through a free market economy
End Result:
Circular Flow Questions
Spending
Goods andservicesbought
Goods andservicesbought
Revenue
Goodsand servicessold
Goodsand servicessold
Labor, land,capital & entrepreneurshipLabor, land,capital & entrepreneurship
Income
= Flow of inputs and outputs
= Flow of dollars
Factors ofproductionFactors ofproduction
Wages, rent,and profitWages, rent,and profit
FIRMSFIRMS HOUSEHOLDSHOUSEHOLDS
FACTOR MarketFACTOR MarketFACTOR Market
PRODUCT MARKETPRODUCT MARKET
Economists often Disagree• Do tax cuts lead to more long run economic growth?
• Does large Gov’t debt eventually lead to a financial crisis?
• Will raising the minimum wage lead to significant job loss?
IT DEPENDS!
The answer to most economic questions is:
Business CycleHistorically every economy moves through cycles
Alphabet Economic Recoveries
•http://www.youtube.com/watch?v=d0nvoQL4By8
•Second Video
http://www.pbs.org/newshour/bb/business/july-dec11/makingsense_10-07.html
First Video
Business CycleGraphing Economic History 1980-2013
Business Cycle
?
2000
1990
’s T
echn
olog
y B
oom
2001
2006
Hou
sing
Bub
ble
2008-09
2013
Great R
ecession
Dot.com
Collapse
Current Economics Reading
• Where is the U.S. today in the Business Cycle?
Youth Unemployment
Free Market Failures• Market Failure occurs whenever a market does not allocate
resources efficientlyExamples:
– 1) Collusion/Price Fixing – companies limiting supply and/or fixing prices
– 2) Externalities – when producers do not pay for ALL costs of production
• Government should correct market failures through new policies– examples: cap & trade policies for pollution, taxing fuel inefficient cars– enforcing anti-trust laws (ex: denying the ATT & T-Mobile proposed merger)
Branches of Economics• Microeconomics looks at individual parts of economy:
– How households & firms make decisions and interact in specific markets
• Macroeconomics looks at the entire economy:– Economy-wide phenomena including: inflation, unemployment,
interest rates & GDP (economic growth)