How the Economy as a Whole Works
Prints Too Much Money
Principle 8: A Country's Standard of Living
Depends on Its Ability to Produce Goods and
Services
Standard of living- is the level of wealth, comfort,
material goods, and necessities available to a
certain socioeconomic class or a certain geographic
area
• Huge Variation in living standards around the
worlds and across time
High Income Country’s- Germany, Canada, USA
Low Income Country s- Philippines, Nigeria,
Indonesia, Sudan
• Determinants?
Almost All (***from all resources up to
policies this affects the productivity of a certain
place)
Productivity- amount of goods services produced
per person
Living standard
***for example, in the US, the standard of living is
good because of their productivity, because of their
good allocation of resources (good allocation
equals good productivity) (they also have a good
policy, foe example the qualifications of certain
jobs for the people to meet)
Principle 9: Prices Rise When the Government
(Long run)
• Inflation- An increase in the overall level of
prices in the economy
(***pagtaas ng bilihin sa merkado)
Philippines has 4.5% inflation rate base on the price
index. (4.5% every year)
• What causes inflation? Growth in the quantity of
money
• When the government creates large quantities
of money, the value of the money falls.
Law of supply- price: value of money decrease
Example in Zimbabwe, they have dictatorship
government, and when the president got to
impeach the country, nalubog sa utang, after it the
country decided to print more money resulting in
losing its value
Principle 10: Society Faces a Short-Run Trade-off
between Inflation and Unemployment
 Increasing the amount of money in the
economy stimulates the overall level of
spending and thus the demand for goods
and services.
 Higher demand may over time cause firms
to raise their prices, but in the meantime. it
also encourages them to hire more workers
and
 produce a larger quantity of goods and
services
 More hiring means lower unemployment
***we choose on whether to exist if its
unemployment or inflation.
Higher unemployment rate is equal to its economy
struggling to function, because not all households
don’t have job responsibility (for it to function we
need to have job responsibilities) kaya yung
economy is nahihirapan, that’s why we choose
inflation.
Kapag dumami yung quantity ng pera, tumataas
yung buying power ng households, lumalakas yung
paggastos, and also it resulting in increasing the
demands for goods and services, resulting sa
pagtataas presyo ng mga firms in their products,
and it needs a lot of resources of employees to
produce products resulting to decrease of
unemployment rate. Output- goods and services
Input- land, labor, capital
The Circular Flow
This diagram is a schematic representation of the Our Second Model: The Production Possibilities
organization of the economy. Frontier
Decisions are made by households and firms. The production possibility frontier (PPF) illustrates
Households and firms interact in the markets for the trade-offs facing an economy that produces
goods and services (where households are buyers only two goods. It shows the maximum quantity of
and firms are sellers) and in the markets for the one good that can be produced for any given
factors of production (where firms are buyers and production of the other.
households are sellers). The outer set of arrows
shows the flow of dollars, and the inner set of The PPF improves our understanding of trade-offs
arrows shows the corresponding flow of inputs by considering a simplified economy that
and outputs. produces only two goods by showing this trade-off
graphically.
 A household is a person or a group of
people that share their income. Trade off- we choose in the two options we have to
 A firm is an organization that produces accomplish.
goods and services for sale. Opportunity cost- what we give up to do another
 Firms sell goods and services that they
produce to households in markets for ***PPF just helps us to maximize, to look what is
goods and services the most important opportunity cost we should let
 Firms buy the resources they need to go. Base on the graph.
produce-factors of production-in factor
markets
The illustration shows this economy's production
possibilities frontier. If the economy uses all its
resources in the car industry, it produces 1,000 cars
and no computers. If it uses all its resources in the
computer industry, it produces 3,000 computers
and no cars. The two endpoints of the production
possibilities frontier represent these extreme
possibilities.
Letter F, A, B, E Feasible and efficient in production
Letter C- Not feasible
Letter D- Feasible but not efficient
CONFRONTING SCARCITY: CHOICES IN
PRODUCTION
WHAT IS AN ECONOMY CONFRONTING SCARCITY?

 If more of one good is produced, less of

another good must be produced.
WHAT IS THE PROBLEM OF SCARCITY
CONFRONTED BY?
Scarcity, or a lack of resources, is one of the most
fundamental economic issues we face. We face
scarcity because, while resources are limited, we
are a society with limitless desires.
CHOICES IN PRODUCTION

 In this chapter we use our production

model, to examine the nature of choices to
produce more of some goods and less of
others.
FACTORS OF PRODUCTION
• Choices concerning what goods
and services to produce are
choices about an economy's use of
its factors of production, the
resources available to it for the
production of goods and services.
• The value, or satisfaction, that
people derive from the goods and
services they consume and the
activities they pursue is called
utility.
THE FACTORS OF PRODUCTION IN AN ECONOMY
ARE ITS LABOR, CAPITAL, AND NATURAL
RESOURCES.
• Labor is the human effort that can be
applied to the production of goods and
services. People who are employed or
would like to be are considered part of
the labor available to the economy.
• Capital is a factor of production that
has been produced for use in the
production of other goods and
services. Office buildings, machinery,
and tools are examples of capital.
Application of the Production Possibilities Model
Production Possibilities Model
 The production possibilities model is a
visual model of scarcity and efficiency. It
simplifies the concept of how an economy
can produce things using only two goods as
an example.
 The classic version of the production
possibilities model is the comparison
between two goods that a nation can
produce.
Comparative Advantage and International Trade
• One of the most important implications of the
concepts of comparative advantage and the
production possibilities curve relates to
international trade.
•If nations specialize, then they must rely on each
other. They will sell the goods in which they
specialize and purchase other goods from other
nations.