The

The Foundatio
n of Economics
Employment an
d Efficiency
Unemployment,
Growth, and th
e Future
Economic Syste
ms
2 CHAPTER
Economizing

Problem
The Circular Fl
ow Model
Key Terms

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End
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2-1
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 THE FOUNDATION OF
The Foundatio
n of Economics
ECONOMICS
Employment an
d Efficiency
Unemployment,
SOCIETY HAS VIRTUALLY
Growth, and th
e Future UNLIMITED WANTS...
Economic Syste
ms
The Circular Fl
ow Model
Key Terms

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Slide Slide
End
Show
2-2
Copyright McGraw-Hill/Irwin, 2005
 THE FOUNDATION OF
The Foundatio
n of Economics
ECONOMICS
Employment an
d Efficiency
Unemployment,
SOCIETY HAS VIRTUALLY
Growth, and th
e Future UNLIMITED WANTS...
Economic Syste
ms
The Circular Fl
ow Model
Key Terms

Previous
Slide
Next
Slide
BUT LIMITED OR SCARCE
End
Show PRODUCTIVE RESOURCES!
2-3
Copyright McGraw-Hill/Irwin, 2005
 GOODS & SERVICES PROVIDE...
The Foundatio
n of Economics
Employment an
d Efficiency
Unemployment,
UTILITY
Growth, and th
e Future
Economic Syste
ms
The Circular Fl
ow Model
Key Terms

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End
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2-4
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 GOODS & SERVICES PROVIDE...
The Foundatio
n of Economics
Employment an
d Efficiency
Unemployment,
UTILITY
Growth, and th
e Future
Economic Syste
ms
LUXURIES
The Circular Fl
ow Model
Key Terms

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End
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2-5
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 GOODS & SERVICES PROVIDE...
The Foundatio
n of Economics
Employment an
d Efficiency
Unemployment,
UTILITY
Growth, and th
e Future
Economic Syste
ms
LUXURIES vs. NECESSITIES
The Circular Fl
ow Model
Key Terms

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End
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2-6
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 SCARCE RESOURCES
The Foundatio
n of Economics ECONOMIC RESOURCES
Employment an
d Efficiency
PROPERTY RESOURCES
Unemployment,
Growth, and th
e Future LAND
Economic Syste
ms
The Circular Fl
ow Model
Key Terms

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End
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2-7
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 SCARCE RESOURCES
The Foundatio
n of Economics ECONOMIC RESOURCES
Employment an
d Efficiency
PROPERTY RESOURCES
Unemployment,
Growth, and th
e Future LAND
Economic Syste
ms
The Circular Fl
ow Model CAPITAL
Key Terms

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End
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 SCARCE RESOURCES
The Foundatio
n of Economics ECONOMIC RESOURCES
Employment an
d Efficiency
PROPERTY RESOURCES
Unemployment,
Growth, and th
Notes...
e Future LAND
Economic Syste
ms
INVESTMENT
The Circular Fl
ow Model
REAL
CAPITAL
Key Terms CAPITAL
FINANCIAL
CAPITAL
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End
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2-9
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 SCARCE RESOURCES
The Foundatio
n of Economics ECONOMIC RESOURCES
Employment an
d Efficiency
PROPERTY RESOURCES
Unemployment,
Growth, and th
e Future LAND
Economic Syste
ms
The Circular Fl
ow Model CAPITAL
Key Terms

HUMAN RESOURCES
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End
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2 - 10
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 SCARCE RESOURCES
The Foundatio
n of Economics ECONOMIC RESOURCES
Employment an
d Efficiency
PROPERTY RESOURCES
Unemployment,
Growth, and th
e Future LAND
Economic Syste
ms
The Circular Fl
ow Model CAPITAL
Key Terms

HUMAN RESOURCES
Previous Next LABOR
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 SCARCE RESOURCES
The Foundatio
n of Economics ECONOMIC RESOURCES
Employment an
d Efficiency
PROPERTY RESOURCES
Unemployment,
Growth, and th
e Future LAND Also known
Economic Syste
ms
The Circular Fl
CAPITAL
as the
ow Model
Key Terms
Input
Factors of
HUMAN RESOURCES
LABOR Production
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End
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 ENTREPRENEURIAL
The Foundatio
n of Economics ABILITY
Employment an
d Efficiency
Unemployment,
Growth, and th
Takes The Initiative
e Future
Economic Syste
ms Makes Strategic
Business Decisions
The Circular Fl
ow Model
Key Terms

Innovator
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End
Show
Slide
The Risk Bearer
2 - 13
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 RESOURCE PAYMENTS
The Foundatio
n of Economics
Employment an
PROPERTY RESOURCES
d Efficiency
RENTAL
Unemployment,
LAND
INCOME
Growth, and th
e Future
Economic Syste
ms INTEREST
CAPITAL
INCOME
The Circular Fl
ow Model
Key Terms
HUMAN RESOURCES

LABOR WAGES
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PROFIT &
End ENTREPRENEUR
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LOSS
 ECONOMICS & EFFICIENCY
The Foundatio
n of Economics
Employment an
d Efficiency
Unemployment,
Full Employment
Growth, and th
e Future
Economic Syste
ms
The Circular Fl
Full Production
ow Model

Productive Efficiency
Key Terms

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End
Next
Slide Allocative Efficiency
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 PRODUCTION POSSIBILITIES
The Foundatio
n of Economics Assumes...
Employment an
d Efficiency Full Employment
and Productive
Unemployment,
Growth, and th
e Future
Economic Syste
ms
The Circular Fl
Efficiency
ow Model
Key Terms Fixed Resources
Fixed Technology
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Next
Slide Two Goods
End
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for example...
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 PRODUCTION POSSIBILITIES
A Consumer Good
The Foundatio
n of Economics Assumes...
Employment an
d Efficiency Full Employment
and Productive
Unemployment,
Growth, and th
e Future

PEfficiency
Economic Syste

IZ
ms
The Circular Fl
ow Model
Key Terms FixedZResources
A
Fixed Technology
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Next
Slide Two Goods
End
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for example...
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 PRODUCTION POSSIBILITIES
A Capital Good
The Foundatio
n of Economics Assumes...
Employment an
d Efficiency Full Employment
and Productive
Unemployment,
Growth, and th
e Future
Economic Syste
ms
Efficiency
The Circular Fl
ow Model Rob
Fixed Resources
Key Terms
ot s
Fixed Technology
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Next
Slide Two Goods
End
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for example...
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 PRODUCTION POSSIBILITIES
The Foundatio
n of Economics
Employment an
What if we could only produce ..
d Efficiency
Unemployment,
Growth, and th 10,000 Robots
e Future
Economic Syste
ms
or
The Circular Fl
ow Model 400,000 Pizzas
Key Terms

Using all of our resources, to

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get some pizza, we must give
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up some robots!
for example...
End
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 PRODUCTION POSSIBILITIES
The Foundatio
n of Economics
Employment an in table form
d Efficiency
PIZZA 0 1 2 3 4
Unemployment,
Growth, and th (in hundred thousands)
e Future
Economic Syste
ROBOTS 10 9 7 4 0
ms (in thousands)
The Circular Fl
ow Model
Key Terms

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End
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 PRODUCTION POSSIBILITIES
The Foundatio
n of Economics
Employment an in table form
d Efficiency
PIZZA 0 1 2 3 4
Unemployment,
Growth, and th (in hundred thousands)
e Future
Economic Syste
ROBOTS 10 9 7 4 0
ms (in thousands)
The Circular Fl
ow Model graphical form
Key Terms

(thousands)
Robots

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End
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Copyright McGraw-Hill/Irwin, 2005
Pizzas (hundred thousands)
 PRODUCTION POSSIBILITIES
The Foundatio
n of Economics
Employment an in table form
d Efficiency
PIZZA 0 1 2 3 4
Unemployment,
Growth, and th (in hundred thousands)
e Future
Economic Syste
ROBOTS 10 9 7 4 0
ms (in thousands)
The Circular Fl
ow Model graphical form
Key Terms

(thousands)
Robots

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End
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Pizzas (hundred thousands)
 PRODUCTION POSSIBILITIES
The Foundatio
n of Economics
Employment an in table form
d Efficiency
PIZZA 0 1 2 3 4
Unemployment,
Growth, and th (in hundred thousands)
e Future
Economic Syste
ROBOTS 10 9 7 4 0
ms (in thousands)
The Circular Fl
ow Model graphical form
Key Terms

(thousands)
Robots

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End
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Copyright McGraw-Hill/Irwin, 2005
Pizzas (hundred thousands)
 PRODUCTION POSSIBILITIES
The Foundatio
n of Economics
Employment an in table form
d Efficiency
PIZZA 0 1 2 3 4
Unemployment,
Growth, and th (in hundred thousands)
e Future
Economic Syste
ROBOTS 10 9 7 4 0
ms (in thousands)
The Circular Fl
ow Model graphical form
Key Terms

(thousands)
Robots

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End
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2 - 24
Copyright McGraw-Hill/Irwin, 2005
Pizzas (hundred thousands)
 PRODUCTION POSSIBILITIES
The Foundatio
n of Economics
Employment an in table form
d Efficiency
PIZZA 0 1 2 3 4
Unemployment,
Growth, and th (in hundred thousands)
e Future
Economic Syste
ROBOTS 10 9 7 4 0
ms (in thousands)
The Circular Fl
ow Model graphical form
Key Terms

(thousands)
Robots

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End
Show
2 - 25
Copyright McGraw-Hill/Irwin, 2005
Pizzas (hundred thousands)
 PRODUCTION POSSIBILITIES
The Foundatio
n of Economics
Employment an in table form
d Efficiency
PIZZA 0 1 2 3 4
Unemployment,
Growth, and th (in hundred thousands)
e Future
Economic Syste
ROBOTS 10 9 7 4 0
ms (in thousands)
The Circular Fl
ow Model graphical form
Key Terms

(thousands)
Robots

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Slide Slide
End
Show
2 - 26
Copyright McGraw-Hill/Irwin, 2005
Pizzas (hundred thousands)
 PRODUCTION POSSIBILITIES
The Foundatio
n of Economics Limited Resources means
Employment an
d Efficiency
Unemployment, a limited output...
Growth, and th
e Future
Economic Syste
At any point in time,
ms
The Circular Fl
a full-employment, full-
ow Model
Key Terms production economy
must sacrifice some of
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product X to obtain
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2 - 27
more of product Y.
Copyright McGraw-Hill/Irwin, 2005
 PRODUCTION POSSIBILITIES
The Foundatio
n of Economics
Employment an Q 14
d Efficiency 13
Unemployment, Robots (thousands) 12 Unattainable
Growth, and th 11 A
e Future B
10
Economic Syste 9 C W
ms
8
The Circular Fl
7
ow Model
6
D Attainable
Key Terms
5
4
Attainable & Efficient
3 but
2 Inefficient
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End 1 2 3 4 5 6 7 8 Q
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2 - 28 Pizzas (hundred thousands)
Copyright McGraw-Hill/Irwin, 2005
 PRODUCTION POSSIBILITIES
The Foundatio
n of Economics
Employment an Q 14
d Efficiency 13 Notes...
Unemployment, Robots (thousands) 12 Unattainable
LAW OF INCREASING
Growth, and th 11 A OPPORTUNITY
e Future B COSTS
10
Economic Syste 9 The amount
C of other
W
ms
8 products that must be
The Circular Fl
7 forgone or D
sacrificed to
ow Model
6 Attainable
obtain 1 unit of a specific
Key Terms
5
product is called the & Efficient
Attainable
4
3 opportunity
but cost of that
2 good.
Inefficient
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2 - 29 Pizzas (hundred thousands)
Copyright McGraw-Hill/Irwin, 2005
 PRODUCTION POSSIBILITIES
The Foundatio
n of Economics
Employment an Q 14
d Efficiency 13 Notes...
Unemployment, Robots (thousands) 12 LAW OF INCREASINGUnattainable
Growth, and th 11 A
e Future OPPORTUNITY
B COSTS
10 A graph of the production
Economic Syste 9 C W
ms
8 possibilities curve will be
The Circular Fl
7 CONCAVE -Dbowed out
ow Model
6 from the origin. Attainable
Key Terms
5
Attainable
4 Economic resources are
& Efficient
3 but
2 not completely adapt-
Inefficient
Previous Next 1 able to other uses.
E
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2 - 30 Pizzas (hundred thousands)
Copyright McGraw-Hill/Irwin, 2005
 PRODUCTION POSSIBILITIES
The Foundatio Allocative Efficiency: MB=MC
n of Economics
P
Employment an
d Efficiency MC
Unemployment,
Growth, and th Marginal Benefit & Cost $15
e Future MB=MC
Economic Syste
ms
The Circular Fl 10
ow Model
Key Terms

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MB
Slide Slide
End
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1 2 3 Q
2 - 31 Quantity of Pizzas
Copyright McGraw-Hill/Irwin, 2005
 PRODUCTION POSSIBILITIES
The Foundatio
n of Economics
Q 14
Employment an
d Efficiency 13 Unemployment &
12
Underemployment
Unemployment, Robots (thousands)
Growth, and th 11
e Future
10
Economic Syste
ms
9 Shown by Point U
8
The Circular Fl
ow Model 7
6
Key Terms
5 U More of either or
4
3
both is possible
2
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End 1 2 3 4 5 6 7 8 Q
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2 - 32 Pizzas (hundred thousands)
Copyright McGraw-Hill/Irwin, 2005
 PRODUCTION POSSIBILITIES
The Foundatio
n of Economics
Q 14
Notes...Unemployment &
Employment an
d Efficiency 13
12 Economic Growth
Underemployment
Unemployment, Robots (thousands)
Growth, and th 11
e Future
10 The ability to produce
Economic Syste
ms
9 a largerShown by- Point U
total output
8
The Circular Fl
7 a rightward shift of
ow Model
6 the production
Key Terms
5 U More
possibilities curve
of either or
caused by...both is possible
4
3
2
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End 1 2 3 4 5 6 7 8 Q
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2 - 33 Pizzas (hundred thousands)
Copyright McGraw-Hill/Irwin, 2005
 PRODUCTION POSSIBILITIES
The Foundatio
n of Economics
Q 14
Notes...Unemployment &
Employment an
d Efficiency 13
12 Economic Growth
Underemployment
Unemployment, Robots (thousands)
Growth, and th 11
e Future
10
1 – Increase in
Economic Syste
ms
9 Shown
resource by Point U
supplies
8
The Circular Fl
7
ow Model
6
2 – Better resource
Key Terms
5 U quality More of either or
4
3
both is possible
3 – Technological
2 advances
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End 1 2 3 4 5 6 7 8 Q
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2 - 34 Pizzas (hundred thousands)
Copyright McGraw-Hill/Irwin, 2005
 PRODUCTION POSSIBILITIES
The Foundatio
n of Economics
Q 14 A’

Economic
Employment an
d Efficiency 13 B’
Unemployment, Robots (thousands) 12

Growth
Growth, and th 11
e Future
10
Economic Syste C’
9
ms
8
The Circular Fl
ow Model 7
6 D’
Key Terms
5
4
3
2
Previous Next 1 E’
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 PRODUCTION POSSIBILITIES
The Foundatio
n of Economics
Employment an
Two Examples of
ALTA Economic Growth
d Efficiency
Unemployment,
- FAVORS
Growth, and th
e Future PRESENT GOODS
Economic Syste
ms
CURRENT
Goods for the Future

The Circular Fl
ow Model CURVE
Key Terms
FUTURE
CURVE
CONSUMPTION
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End Goods for the Present
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2 - 36
Alta
Copyright McGraw-Hill/Irwin, 2005
 PRODUCTION POSSIBILITIES
The Foundatio
n of Economics
Employment an
Two Examples of
ALTA Economic Growth
d Efficiency
Unemployment,
- FAVORS ZORN - FAVORS
Growth, and th
e Future PRESENT GOODS FUTURE GOODS
Economic Syste
ms
CURRENT CONSUMPTION
Goods for the Future

Goods for the Future

The Circular Fl
ow Model CURVE
Key Terms
FUTURE FUTURE
CURVE CURVE
CONSUMPTION CURRENT
CURVE
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End Goods for the Present Goods for the Present
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Alta Zorn
Copyright McGraw-Hill/Irwin, 2005
 PRODUCTION POSSIBILITIES

Applications...
The Foundatio
n of Economics
Employment an
d Efficiency
Unemployment,
Growth, and th
e Future
• Unemployment and
Economic Syste
ms Productive Inefficiency
The Circular Fl
ow Model
Key Terms

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End
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Copyright McGraw-Hill/Irwin, 2005
 PRODUCTION POSSIBILITIES

Applications...
The Foundatio
n of Economics
Employment an
d Efficiency
Unemployment,
Growth, and th
e Future
• Unemployment and
Economic Syste
ms Productive Inefficiency
The Circular Fl
ow Model • Tradeoffs and
Key Terms
Opportunity Costs

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End
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 PRODUCTION POSSIBILITIES

Applications...
The Foundatio
n of Economics
Employment an
d Efficiency
Unemployment,
Growth, and th
e Future
• Unemployment and
Economic Syste
ms Productive Inefficiency
The Circular Fl
ow Model • Tradeoffs and
Key Terms
Opportunity Costs
• Shifts in the Production
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Slide Possibilities Curves
End
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Copyright McGraw-Hill/Irwin, 2005
 ECONOMIC SYSTEMS
The Foundatio
n of Economics
Employment an
d Efficiency
THE MARKET SYSTEM
Unemployment,
Growth, and th
e Future
Pure Capitalism
Economic Syste
ms
Laissez-faire
The Circular Fl
ow Model
Key Terms

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End
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Copyright McGraw-Hill/Irwin, 2005
 ECONOMIC SYSTEMS
The Foundatio
n of Economics
Employment an
d Efficiency
THE MARKET SYSTEM
Unemployment,
Growth, and th
e Future
Pure Capitalism
Economic Syste
ms
Laissez-faire
The Circular Fl
ow Model
Key Terms
THE COMMAND SYSTEM
Socialism
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Slide Communism
End
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Copyright McGraw-Hill/Irwin, 2005
 CIRCULAR FLOW MODEL
The Foundatio
n of Economics
Employment an RESOURCE
d Efficiency
MARKET
Unemployment,
Growth, and th
e Future
Economic Syste
ms
The Circular Fl
ow Model BUSINESSES HOUSEHOLDS
Key Terms

Previous Next
Slide Slide PRODUCT
MARKET
End
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2 - 43
Copyright McGraw-Hill/Irwin, 2005
 CIRCULAR FLOW MODEL
The Foundatio
n of Economics
Employment an RESOURCE
d Efficiency
MARKET
Unemployment,
Growth, and th
e Future RESOURCES INPUTS
Economic Syste
ms
The Circular Fl
ow Model BUSINESSES HOUSEHOLDS
Key Terms

Previous Next
Slide Slide PRODUCT
MARKET
End
Show
2 - 44
Copyright McGraw-Hill/Irwin, 2005
 CIRCULAR FLOW MODEL
The Foundatio
n of Economics $ COSTS $ INCOMES
Employment an RESOURCE
d Efficiency
MARKET
Unemployment,
Growth, and th
e Future RESOURCES INPUTS
Economic Syste
ms
The Circular Fl
ow Model BUSINESSES HOUSEHOLDS
Key Terms

GOODS & GOODS &

SERVICES SERVICES
Previous Next
Slide Slide PRODUCT
MARKET
End
Show
2 - 45
Copyright McGraw-Hill/Irwin, 2005
 CIRCULAR FLOW MODEL
The Foundatio
n of Economics $ COSTS $ INCOMES
Employment an RESOURCE
d Efficiency
MARKET
Unemployment,
Growth, and th
e Future RESOURCES INPUTS
Economic Syste
ms
The Circular Fl
ow Model BUSINESSES HOUSEHOLDS
Key Terms

GOODS & GOODS &

SERVICES SERVICES
Previous Next
Slide Slide PRODUCT
MARKET
End
Show
2 - 46
Copyright McGraw-Hill/Irwin, 2005
 CIRCULAR FLOW MODEL
The Foundatio
n of Economics $ COSTS $ INCOMES
Employment an RESOURCE
d Efficiency
MARKET
Unemployment,
Growth, and th
e Future RESOURCES INPUTS
Economic Syste
ms
The Circular Fl
ow Model BUSINESSES HOUSEHOLDS
Key Terms

GOODS & GOODS &

SERVICES SERVICES
Previous Next
Slide Slide PRODUCT
MARKET
End
Show $ REVENUE $ CONSUMPTION
2 - 47
Copyright McGraw-Hill/Irwin, 2005
 CIRCULAR FLOW MODEL
The Foundatio
n of Economics $ COSTS $ INCOMES
Employment an RESOURCE
d Efficiency
MARKET
Unemployment,
Growth, and th
e Future RESOURCES INPUTS
Economic Syste
ms
The Circular Fl
ow Model BUSINESSES HOUSEHOLDS
Key Terms

GOODS & GOODS &

SERVICES SERVICES
Previous Next
Slide Slide PRODUCT
MARKET
End
Show $ REVENUE $ CONSUMPTION
2 - 48
Copyright McGraw-Hill/Irwin, 2005
economizing problem production possibilities table
economic resources production possibilities curve
land opportunity cost
capital law of increasing opportunity cos
ts
investment
labor economic growth
entrepreneurial ability economic system
factors of production market system
full employment capitalism
full production command system
productive efficiency
allocative efficiency resource market
consumer goods product market
capital goods circular flow model
Copyright McGraw-Hill/Irwin, 2005 BACK END
 Chapter 3
The Foundatio
n of Economics
Employment an
d Efficiency
Unemployment,
Growth, and th
e Future INDIVIDUAL MARKETS:
Economic Syste
ms
The Circular Fl
ow Model DEMAND & SUPPLY
Key Terms

Previous
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Next
Slide
Coming Soon…
End
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2 - 50
Copyright McGraw-Hill/Irwin, 2005