Economic Activity Markets A market is a location

Economic Activity

Markets A market is a location or other situation that allows buyers and sellers to exchange a certain economic product. p Markets can be local, regional, national, or global. p

Circular Flow of Economic Activity p p The economic decision makers are the consumer, business, government and foreign sectors. A circular flow of economic activity— resources, goods and services, and money— takes place among these groups.

Factor Markets Consumers earn their income in factor markets, where productive resources are bought and sold. p Workers sell their labor for income. p People who own land loan it in return for rent. p People who own capital exchange it for interest. p Factor Markets

Product Markets People spend their income in product markets, where producers offer goods and services for sale. p Businesses receive payments for their products from consumers. p They spend this income on natural resources, labor, and capital to make more products. p Product Markets

The Business Sector p The business sector buys capital goods in the product markets to use in production. Business Sector Product Markets Factor Markets

The Circular Flow of Economic Activity Product Markets Business Sector Consumer Sector Factor Markets

Productivity is a measure of the amount of output produced by a given amount of inputs in a specific period of time. p It reflects how efficiently resources are being used. p

Specialization p p Specialization can improve productivity. People, businesses, and countries concentrate on the goods or services they can produce better than anyone else. We specialize because we earn more by doing the things we do well. It is also more efficient to specialize than to do everything for ourselves.

Division of Labor Division of labor is the breaking down of a job into separate, smaller tasks performed by different workers. p It is a form of specialization, making use of differences in skills. p

Standard of Living Standard of living is the quality of life based on the possession of necessities and luxuries that make life easier. p When GDP grows faster than the population, there are more goods and services, on average, for us to enjoy. p

Gross Domestic Product (GDP) is a measure of the size of the economy. p It is the total value, in dollars, of all final goods and services produced in the country during a single year. p Final goods are goods sold to their users. p U. S. Gross Domestic Product by Major Societal Function: 2004

Not Included in GDP does not count intermediate goods (raw materials), which are components of final goods. p It also does not count the sale of used goods, which do not represent new production. p

Analyzing GDP If the new GDP is higher than the previous one, then the economy is expanding. p If it is lower, the economy is declining. p Economists study GDP figures regularly to analyze business cycle patterns. p