Circular Flow of Economic Activity

Transcription

1 Business Income Circular Flow of Economic Activity Product Market Consumer Spending Firms Goods and Services Goods and Services Households Taxes Taxes Businesses Individuals Productive Resources Physical Flow Provide Physical and Intellectual Labor Payment for Resources Factor Markets Income Earned Monetary Flow 1

2 Making Economic Decisions Final Choice Trade offs (choices) Top 2 Choices Opportunity Cost 2

3 Cars Production Possibilities Frontier What condition determines the shape of the curve? The Law of Increasing Costs 70 a d 40 e b Shared Production Factors c Guns 3

4 Price Demand Curve Law of Demand: The quantity demanded varies inversely with the price. Quanity Demanded 4

5 $7 Price $6 $5 $4 $3 Elasticity of Demand: A measure of how consumers respond to price change. $2 $ Quantity Total Expenditure: 5

6 Total Expenditure = Total Revenue Revenue Table Price of Good Quantity Demanded (per/day) Total Revenue $ $ $ $ $ $ What is the over all effect of a price increase? 6

7 Practice Scenario: Y Qd Qd Qd $ $1.00 $1.50 $2.00 $2.50 $ Using the points given, create a demand curve. 2. Demonstrate and explain a positive change in demand. 3. Demonstrate and explain a negative change in demand Calculate the Price Elasticity of Demand (PED) for N along each point on the curve. 5. Indicate points on the negative and positive shift lines assuming these are demand curves for other goods. 6. Calculate the XPED using some of the points created in Assume there is an income change from $25,000 to $30,000. Calculate the Ye for N using information from a point on the outward shift and the inward shift lines separately (discounting #5). 7

8 $ s2 s s3 70 Price Quantity Supplied 8

9 The Law of Variable Proportions Number of Workers Total Product Marginal Product Regions of Production 0 0 Stage I Stage II Stage III

10 new price Price (per unit) Marginal Revenue $13 old price Marginal Cost Output (units per hour) 10

11 Short Run Costs $ TC VC FC Unit of Output 11

12 $ (cost) increasing specialized equipment Increasing specialized labor inputs = X/outputs = X+ inputs increase by X & outputs inc. by X Costs stabilize Business is too large having coordination problems begin to sell off divisions outputs increase slower than cost of inputs SRATC LRATC Economies of scale. Constant returns of scale Diseconomies of scale Q (output) 12

13 Employees are earning $110 per day FC VC TC MC TR MR XXXX 13

14 Finding Equilibrium Product Price Quantity Demanded Quantity Supplied $ $ $ $ $ $ Results 14

15 a D S Lost Consumer Surplus Price e c Price Floor Gain in Producer Surplus f Lost Producer Surplus Price Ceiling b Quantity (Output) Dead weight loss: The loss in producer and consumer surplus due to an inefficient level of production. 15

16 Tax Incidence and Deadweight Loss 16

17 Tax Incidence and Elasticity 17

18 Business Type Propietorship General Partnership Limited Partnership LLC (Limited Liability Company) Corporation Advantage 1. Easy to start 2. Little gov't regulations 3. Profits stay with owners 4. Complete control 5. Lower taxes 1. Easy to start 2. Little gov't regulation 3. Not difficult to raise funds 4. Combination of skills 1. Easy to start 2. Little gov't regulations 3. Not difficult to raise funds 4. Can be a non managing owner with limited liability. 1. No annual meetings required 2. Protected from personal liability 3. Partnership style taxation. 1. Easy to raise money 2. Limited liability 3. Unlimited life 4. Specialized management 5. Risks are shared Disadvantage 1. Unlimited liability 2. Limited life of the business 3. Difficult to raise money 4. Risk of loss not shared 1. Unlimited liability 2. Profits are shared 3. Limited life of the business 4. Disagreements 1. Managing partners have unlimited liability 2. Profits are shared 3. Limited life of the business 1. No Board of Directors for guidance 2. Can not trade publicly 3. More expensive to set up 4. Fees and filings to state 5. Limited to type of business in some states. 1. Difficult to start 2. Less direct control 3. Double taxation 4. Limited Activities Stock No No No No Yes Opportunity 18

19 Market Individual Firm $15 $22.50 MC MR $10 Addition to Profits $4.75 $4.50 Quantity Subtraction from Profits 19

20 $ Monopolistic Competition MC ATC MR D Q Fewer Products, Higher Prices, Less Competition 20

21 Circular Flow of Finance Non bank Financial Intermediaries Surplus Funds Households, businesses Financial Intermediaries Commercial Banks Savings and Loans Savings Banks Mutual Savings Banks Credit Unions Life Insurance Comp. Mutual Funds Pension Funds Finance Companies Governments, businesses Financial Assets 21

22 Attachments language_of_the stock_market powerpoint_presentation_1122g1.ppt ROI.doc Stock Table Worksheet.doc