Warm-up

1. Warm-up On a piece of paper, describe how you think individuals (consumers), businesses (producers), and the government interact with each other in today’s economy.

2. The Circular Flow Model How Things Work in a Mixed-Market Economic System

3. In our economic system there are two sectorsthe business sector and the household sector

4. Households • Demand consumer goods, like: cars, computers, washers, lawnmowers, etc. • Households provide labor resources to business and own most of the resources of production

5. Businesses • Produce and supply goods and services • Businesses demand resources for production: land, labor, capital, and entrepreneurs

6. These two sectors interact in two markets: the Product Market and the Factor Market

7. Product Markets • are the markets where households acquire finished (consumer) goods & services. • The markets we are most familiar with are retail markets. • Examples include: Wal-Mart, gas stations, Burger King, Best Buy, the dentist.

8. Product Markets

9. Factor Markets • are the markets where business acquire the factors of production (land, labor, capital..) • When you are looking for a job you are in the factor (labor) market. • Examples include: Cowan Equipment, IBM Business Solutions, Snelling Personnel

10. Product Markets Businesses produce goods and provideservices in the product market.In exchange households pay for goods &services with consumption expenditures (money) Factor Markets

11. Product Markets Households provide labor, own land, invest in capital and have the talent businesses need to produce goods and services.To pay for these resources business pay wages and salaries, pay rent, purchase raw material, pay dividends to households. Factor Markets

12. Product Markets goods & services… ….goods & services ….consumption spending…. ….salaries, wages, rent, dividends….. Factor Markets land, labor, capital…… …entrepreneurial ability

13. Product Markets goods & services… ….goods & services ….consumption spending…. In a mixed economy its not always this simple, something is missing. The Government ….salaries, wages, rent, dividends….. Factor Markets land, labor, capital…… …entrepreneurial ability

14. Governments • Federal, State, & Local • Governments require resources to provide services • To purchase these resources governments collect taxes • Government spending makes up 20% of GDP

15. Product Markets goods & services… ….goods & services ….consumption spending…. ….salaries, wages, rent, dividends….. Factor Markets land, labor, capital…… …entrepreneurial ability

16. Product Markets goods & services… ….goods & services ….consumption spending…. Personal Income Taxes Corporate Income Taxes ….salaries, wages, rent, dividends….. Factor Markets land, labor, capital…… …entrepreneurial ability

17. Product Markets goods & services… ….goods & services ….consumption spending…. Personal Income Taxes transfer payments subsidies Corporate Income Taxes ….salaries, wages, rent, dividends….. Factor Markets land, labor, capital…… …entrepreneurial ability

18. Product Markets goods & services… ….goods & services ….consumption spending…. Personal Income Taxes transfer payments subsidies Corporate Income Taxes ….salaries, wages, rent, dividends….. Factor Markets land, labor, capital…… …entrepreneurial ability

19. Any Questions? Are you sure???

20. Circular Flow

21. Circular Flow $$$$ $$$$ $$$$ $$$$ Factor Market Land, Labor, Capital Land, Labor, Capital taxes Public G & S Consumer Sector Gov’t Sector Business Sector taxes Public G & S Goods & Services Goods & Services ProductMarket $$$$ $$$$ $$$$ $$$$

22. The FourFactors of Production . 1. Land [natural resources] – [“gifts of nature”] Water Wind “Gifts of Nature” Fossil fuels Sun

23. 2. Labor [human resources] anyone who works [“paid work”] A. Physical – pro athletes & lumberjacks B.Intellectual – accountants & lawyers . “Hired Help”

24. . 3. Capital Resources – all “man-made inputs” used to produce consumer products (machinery, physical plants, & tools). A. Capital goods – goods [machinery, buildings, & tools] used to produce other goods. [crane, Ford plant, hammer]

25. Notes... Real Capitalv.FinancialCapital . INVESTMENT REAL CAPITAL [tools, machinery, & factories] Can produce something directly with these FINANCIAL CAPITAL [stocks, bonds, & money] Can’t produce anything directly with these

26. Rent Wages Interest Profits Land Labor Capital Entrepreneur . 4. Entrepreneurship – Combines land, labor, & capital to produce products. Resource payments. The resource owners receive rent [for the use of their land; wages[for their labor];interest [payment for financial capital], and profits[for their entrepreneurial ability].

27. The Harley Hog Circular Flow Resource Market Product Market

28. Hog CIRCULAR FLOW MODEL RESOURCE MARKET 1 2 Mechanic Flow 4. Goods/services HOUSEHOLDS BUSINESSES Flow 3: Consumer expenditures PRODUCT MARKET 3 4

29. Hog CIRCULAR FLOW MODEL RESOURCE MARKET 1 2 Mechanic Flow 4. Goods/services HOUSEHOLDS BUSINESSES Flow 3: Consumer expenditures Flow 1: Land, Labor, Capital, Entrepreneur Flow 2: Rent, Wages, Interest, Profits PRODUCT MARKET 3 4

30. CIRCULAR FLOW MODEL RESOURCE MARKET BUSINESSES HOUSEHOLDS Mechanic Businesses supply hogs g/s PRODUCT MARKET I demand that hog & will pay. Householders demand hogs & will pay

31. CIRCULAR FLOW MODEL Resource Market RESOURCE MARKET Mechanic Householders Show me the money! & you’ll get this hog. Businesses BUSINESSES HOUSEHOLDS GOODS & SERVICES GOODS & SERVICES PRODUCT MARKET $ REVENUE $CONSUMPTION

32. CIRCULAR FLOW MODEL Resource Market RESOURCE MARKET I demanded this hog and had to pay for it. Mechanic Householders Show me the money! & you’ll get this hog. Businesses BUSINESSES HOUSEHOLDS GOODS & SERVICES GOODS & SERVICES PRODUCT MARKET $ REVENUE $CONSUMPTION

33. CIRCULAR FLOW MODEL Resource Market RESOURCE MARKET HH supply hog labor I demanded this hog and had to pay for it. Mechanic H.D. demands hog labor & will pay Householders Show me the money! & you’ll get this hog. Businesses BUSINESSES HOUSEHOLDS GOODS & SERVICES GOODS & SERVICES PRODUCT MARKET $ REVENUE $CONSUMPTION

34. CIRCULAR FLOW MODEL Resource Market $ COSTS $ INCOMES BUSINESSES Give me your hog labor & I’ll show you the money. HOUSEHOLDS GOODS & SERVICES GOODS & SERVICES PRODUCT MARKET

35. CIRCULAR FLOW MODEL Resource Market $ COSTS $ INCOMES I supplied hog labor & was paid.. BUSINESSES HOUSEHOLDS GOODS & SERVICES GOODS & SERVICES PRODUCT MARKET

36. CIRCULAR FLOW MODEL $ COSTS $ INCOMES RESOURCE MARKET RESOURCES INPUTS BUSINESSES HOUSEHOLDS GOODS & SERVICES GOODS & SERVICES PRODUCT MARKET $ REVENUE $ CONSUMPTION

37. The Circular-Flow Diagram Product Market 1 2 What flow are the following? A. Consumer expenditures? B. Goods and services? C. Land, labor, capital, and entrepreneurs? D. Rent, wages, interest, and profits? 2 1 4 Businesses 3 Households Labor 3 4 Resource Market

38. The Circular-Flow Diagram Resource Market 1 2 • What flow are the following? • A. Goods/services? • B. Consumer expenditures? • C. Land, labor, capital and • entrepreneurial ability? • Rent, wages, interest, • and profits? 4 3 1 2 Households Businesses 3 4 Product Market

39. NS 56-59 Fuzzy Wuzzy 56. In the product market (householders/businesses) are the demanders and (householders/businesses) are the suppliers. 57. In the resource market (householders/businesses) are the demandersand (householders/businesses) are the suppliers. 58. In the resource market, (householders/businesses) sell resources to (householders/businesses). 59. In the product market, (householders/businesses) sell productsgoods/services to (householders/businesses).