ChapterChapter

EconomicEconomic

FactorsFactors3

Chapter ObjectivesStudents will learn: How a market economy works and what its

major characteristics are. What the circular flow model is and why it

is important. What can increase the amount of goods

and services that an economy produces. What the production possibilities curve is

and what information it conveys. What specialization and trade are and the

role they play in the market economy system in creating market efficiency.

How a Market Economy Works

– A change in the

system affects the

other parts– Producers: people

who transform natural

resources, human

resources, and capital resources into goods and services.

– Entrepreneurship: start new businesses, new products, new services, and manage them.

Characteristics of a Market Economy

1. Freedom

2. Trade

3. Private Property

4. Profit

5. Competition

FREEDOM

TRADE

Producers & Consumers– consumer must believe

what they buy is worth the price

– seller must profit

PRIVATE PROPERTY• The right to own stuff

• Ownership makes risk worthwhile

PROFIT

• better off after buying

or selling

• risk in hopes of some wealth

• Wealth=ownership

• incentive/motivation

COMPETITION• freedom

• encourages innovation

and new ideas

• improves quality

• reduces price

• encourages efficiency– efficient: make the most of their resources,

make as large a profit as possible

Circular Flow of Economic Activity

• Circular flow model: shows how a market is organized

– Production– Consumption– flow of money

• Factor Market– wages for workers– natural resources– tools, buildings, capital

• Product Market– consumers buy goods and services– businesses use profits to purchase in factor markets

Production Possibilities

• Market economy based on idea that best way to respond to scarcity is by making the most of every resource

• Encourages efficiency

Examining Production Possibilities

• Production possibilities curve: shows limits of production

• What’s possible?

• PP at any moment is limited not fixed.

• Variables can influence/change

Economic Growth

expansion of production possibilities

• Trade-offs at national level

• Opportunity Cost at national level

Capital Accumulation

• Expansion of production possibilities

– Accumulation=collect, increase, build up

– Capital=tools, machines– Infrastructure=roads,

airports, factories, sewers, mass transit, and other public goods

Productivity: – amount of goods/services worker can

produce in a certain amount of time

– Research & Development

“What increases productivity for you?”

Specialization & Trade

• Some people are better at some things than others

• Concentrating on

fewer tasks allows

more to be done

with fewer resources

Specialization

“focusing on making few goods

or services”– Opposite=self-sufficient– Encourages the need for trade– Absolute advantage=ability to produce a

product or service using fewer resources than other producers require

Specialization & Comparative Advantage

• Specialization lets individuals focus on what they do best

• Why specialize? Comparative advantage– Comp adv.=relatively low opportunity cost– In comparison to others

• Law of comparative advantage=those with lower opportunity cost should specialize in that product or service even if they do not have an absolute advantage

• Specializing expands production possibilities

US Productivity in Manufacturing

Interdependence• Important part of

modern life

• Person to person,

business to business,

state to state, nation to nation

• Negative effect of outside events?

• Gains in productivity offset losses