Understanding the basic Understanding the basic operation of an operation of an

economic systemeconomic system

Allocating resources in a Allocating resources in a market economymarket economy

limited resources limited resources or or The Factors of The Factors of ProductionProduction……

The root of the scarcity The root of the scarcity problemproblem

Factors of ProductionFactors of ProductionGroups of resources used to make Groups of resources used to make all goods and servicesall goods and services

Land, Land, labor, labor, capital, capital, entrepreneurshipentrepreneurship

Privately owned in a market

system

LANDLAND

Natural resourcesNatural resources

LABORLABOR

Any effort a person devotes to a Any effort a person devotes to a task for which that person is task for which that person is paidpaid

CAPITALCAPITAL

Any Any human made human made resource that resource that is used to create other goods is used to create other goods and servicesand services

•Physical capitalPhysical capital goods like goods like building and tools for the purpose of building and tools for the purpose of productionproduction

•Human capitalHuman capital is the knowledge is the knowledge and skills a worker gains through and skills a worker gains through education and experienceeducation and experience

ENTREPRENEURSHIPENTREPRENEURSHIP

A person who assembles the factors of production to create goods and services

Risk-taker!

Circular flow of Circular flow of economic activityeconomic activity

Tying it all together…Tying it all together…Maintaining a proper functioning Maintaining a proper functioning

a free market is not easy or simplea free market is not easy or simple

The Pillars of Free Enterprise

PillarPillar Explanation (From producer Explanation (From producer view & consumer view)view & consumer view)

ExampleExample

Private Property For purposes of business enterprise, or as a result of consumer choice

Factory ownerHome ownerCar owner

Choice For purposes of production and profit, to fulfill consumer wants/needs

open a businessChoose a profession jobConsumer choice

Voluntary Exchange Where the producer and consumer come together: the marketplace (willingly buy or sell)

Places of exchange (mall, internet)Contracts

Competition Within industries –maintain quality and fair prices, As consumers (demand) push prices up

Gas stations, Airline industries, Supermarkets, Stock Market

Economic Incentives For purpose of profit, wage, interest, Or “get a good deal”

Successful entrepreneurs make big money -profitSalary, Fringe benefits

PAYMENTS: Economic IncentivePAYMENTS: Economic Incentive

RENTRENT

SALARYSALARY

INTERESTINTEREST

PROFITPROFIT

•LAND

•LABOR

•CAPITAL

•ENTRE-PRENEURSHIP

Why money…

Government’s Role?Government’s Role?From Res. Owners to Gov’tFrom Res. Owners to Gov’t

– taxes taxes – Productive servicesProductive services

From Bus. Owners to Gov’tFrom Bus. Owners to Gov’t– taxes taxes – business servicesbusiness services

From Gov’t to Res OwnersFrom Gov’t to Res Owners– money paymentsmoney payments– Gov’t servicesGov’t services

From Gov’t to Bus OwnersFrom Gov’t to Bus Owners– money paymentsmoney payments– Gov’t servicesGov’t services

Gross Domestic Product Gross Domestic Product  one of the primary indicators used to gauge the health of a country's economy

 at its most basic: a total of what everyone has earned in a year (income approach), or by a total of what everyone spent (expenditure method). 

what GDP represents, has a large impact on nearly everyone within that economy

Adapted from: http://www.investopedia.com/ask/answers/199.asp

HOW DO THE FOUR FACTORS OF PRODUCTION AND THE CIRCULAR FLOW OF ECONOMIC ACTIVITY RELATE TO …

UNEMPLOYMENT?

BUSINESS GROWTH?

MINIMUM WAGE?

GOVERNMENT SPENDING?