Understanding the basic operation of an economic system

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Understanding the basic operation of an economic
system

• Allocating resources in a market economy

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limited resources or The Factors of Production

• The root of the scarcity problem

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Factors of Production

• Groups of resources used to make all goods and
  services
• Land,
• labor,
• capital,
• entrepreneurship

Privately owned in a market system
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LAND

• Natural resources

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LABOR

• Any effort a person devotes to a task for which
  that person is paid

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CAPITAL

• Any human made resource that is used to create
  other goods and services
• Physical capital goods like building and tools
  for the purpose of production
• Human capital is the knowledge and skills a
  worker gains through education and experience

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ENTREPRENEURSHIP
A person who assembles the factors of production
to create goods and services Risk-taker!
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Circular flow of economic activity
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Tying it all together

• Maintaining a proper functioning a free market
  is not easy or simple

The Pillars of Free Enterprise
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Pillar Explanation (From producer view consumer view) Example
Private Property For purposes of business enterprise, or as a result of consumer choice Factory owner Home owner Car owner
Choice For purposes of production and profit, to fulfill consumer wants/needs open a business Choose a profession job Consumer 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 -profit Salary, Fringe benefits
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PAYMENTS Economic Incentive

• RENT
• SALARY
• INTEREST
• PROFIT

• LAND
• LABOR
• CAPITAL
• ENTRE-PRENEURSHIP

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Why money
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Governments Role?

• From Res. Owners to Govt
• taxes
• Productive services
• From Bus. Owners to Govt
• taxes
• business services
• From Govt to Res Owners
• money payments
• Govt services
• From Govt to Bus Owners
• money payments
• Govt services

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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/answ
ers/199.asp
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HOW DO THE FOUR FACTORS OF PRODUCTION AND THE
CIRCULAR FLOW OF ECONOMIC ACTIVITY RELATE TO
GOVERNMENT SPENDING?
UNEMPLOYMENT?
BUSINESS GROWTH?
MINIMUM WAGE?