Transcript the circular flow model - Choose your book for Principles of

Chapter 1
Introduction
© 2002 South-Western
Economic Principles
• The Earth’s Resources
• Renewable vs. Nonrenewable
Resources
• Insatiable Wants
• Scarcity and Choice
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Economic Principles
• Economic Model Building
• Microeconomic and
Macroeconomic Analysis
• Positive and Normative
Economics
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Natural Resources
A natural resource is a
gift of nature.
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Natural Resources
Examples of natural resources
include:
• land
• the uncultivated produce of land
• water
• minerals
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Natural Resources
There are two kinds of natural
resources:
• Renewable
• Nonrenewable
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Natural Resources
• A renewable natural resource is
one that can be replenished.
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Natural Resources
Renewable natural resources
include:
• forests
• sea and land animals
• water
• grasses and forage on rangelands
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Natural Resources
• A nonrenewable natural
resource is one that cannot be
replenished.
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Natural Resources
Nonrenewable natural resources
include:
• metals
and ores
• oil and natural gas
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Natural Resources
Are we running out of natural
resources?
• We live in a finite world
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Natural Resources
Are we running out of natural
resources?
• Our knowledge of a resource’s relative
scarcity, particularly when considering
its availability in the not-too-distant
future, is less than exact.
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Natural Resources
Are we running out of natural
resources?
• Even though some resources are
renewable, the overproduction of lands
and overharvesting of resources to meet
the needs of a rapidly growing human
population can destroy our living
resources.
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Natural Resources
Are we running out of natural
resources?
• Properly managed conservation of
resources can both protect natural
resources and even increase their supply.
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Scarcity
Scarcity is the perpetual state of
insufficiency of resources to satisfy
people’s unlimited wants.
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Scarcity
Two competing facts create scarcity:
• Because
we live on planet
earth, the supple of resources
available to us is limited.
• Our wants for goods that are
produced by the limited
resources is unlimited.
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Scarcity
Examples of things that are
scarce:
• Super Bowl tickets
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Scarcity
Examples of things that are
scarce:
• Meals at a fine restaurant
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Scarcity
Examples of things that are
scarce:
• Admission to an elite university
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Scarcity
Examples of things that are not
scarce:
• Snow and ice in Alaska
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Scarcity
Examples of things that are not
scarce:
• Sand in a desert
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Scarcity
Some things that are not scarce can
become scarce.
• Air in the atmosphere is not
scarce.
• Clean, unpolluted air is scarce
in many metropolitan areas,
however.
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Scarcity and Consumers
• No
one will knowingly pay a
positive price for something that
is not scarce.
• If something is not scarce,
there is enough to satisfy
everyone’s wants and the price
system is not necessary to decide
who can have it and who cannot.
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The Study of Economics
Economics is the study of how
people work together to
transform resources into goods
and services to satisfy their
wants.
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The Study of Economics
Four central questions of
economics:
• Who decides what goods to produce?
• How are goods produced?
• Who gets the goods produced?
• Who produces what?
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Consumer Sovereignty
Consumer Sovereignty
• The Freedom of consumers to
determine what goods and
services they will buy.
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Consumer Sovereignty
Consumer sovereignty affects the
economy in several ways.
• Consumer decisions ultimately
determine what goods and services the
economy will produce.
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Consumer Sovereignty
Consumer sovereignty affects the
economy in several ways.
• Consumer decisions determine who
gets what goods.
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Economic Models
Economic Models
• Economic models are simplified
abstractions of the real world.
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Economic Models
1. How can economic models be
expressed?
• pictorially
• graphically
• algebraically
• verbally
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Economic Models
Economists use models because
the world is too complex to fully
and comprehensively consider at
one time.
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Economic Models
Ceteris Paribus
• Ceteris Paribus is a Latin
phrase meaning “everything else
being equal.”
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Economic Models
The ceteris paribus assumption
allows economists to develop oneto-one, cause-and-effect
relationships in isolation.
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Economic Models
The role of ceteris paribus:
• isolates
one factor at a time in
an experiment or study.
• allows researchers to identify
cause-and-effect relationships
removed from other factors.
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EXHIBIT 1
THE CIRCULAR FLOW MODEL
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Circular Flow Model
There are two principal players in
the circular flow model
• households
• firms
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Circular Flow Model
Households
• A household is an economic unit
of one or more persons, living
under one roof, that has a source
of income and uses it in whatever
way it deems fit.
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Circular Flow Model
Firms
• A firm is an economic unit that
produces goods and services in
the expectation of selling them to
households, other firms, or the
government.
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Circular Flow Model
Resource Market
• The resource market is the
market in which households
supply resources to firms.
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Circular Flow Model
These resources can include
• land
• labor
• capital
• entrepreneurship
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Circular Flow Model
Firms pay for these resources with:
• wages
• rent
• interest
• profit
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Circular Flow Model
Product Market
• The product market is the
market in which firms supply
goods and services to households.
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Circular Flow Model
Product Market
• Households pay for goods and
services they buy in the product
market with the income they
received from supplying
resources in the resource market.
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Circular Flow Model
Circular Flow Model
• In this model, households
supply resources to firms, and
firms supply goods and services
to households.
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Micro vs. Macro
The study of economics is divided
into two areas
• microeconomics
• macroeconomics
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Micro vs. Macro
Macroeconomics
• Macroeconomics analyzes the
behavior of the market as a
whole.
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Micro vs. Macro
Microeconomics
• Microeconomics analyzes
individual and firm behavior,
especially in market conditions.
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Positive vs. Normative
Economics
There are two different approaches
to the study of economics
• Positive
economics
• Normative economics
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Positive vs. Normative
Economics
Positive Economics
• Positive economics is a subset of
economics that analyzes the way
the economy actually operates.
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Positive vs. Normative
Economics
Normative Economics
• Normative economics is a subset
of economics founded on value
judgments and leading to
assertions of what ought to be.
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