The Circular Flow Model

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30 Οκτ 2013 (πριν από 3 χρόνια και 11 μήνες)

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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.

The Circular Flow Model

How Things Work in a

Mixed
-
Market Economic System

In our economic system there are two sectors

the business sector and the household sector

Households


Demand consumer
goods, like: cars,
computers, washers,
lawnmowers, etc.


Households provide
labor resources to
business and own
most of the resources
of production

Businesses


Produce and supply
goods and services


Businesses demand
resources for
production: land,
labor, capital, and
entrepreneurs



These two sectors interact in two markets:

the Product Market and the Factor Market

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.



Product

Markets

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


Product

Markets

Factor

Markets

Businesses produce goods and provide

services in the product market.

In exchange households pay for goods &

services with consumption expenditures

(money)

Product

Markets

Factor

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.

Product

Markets

Factor

Markets

goods & services…

….goods & services

….consumption spending….

….salaries, wages, rent, dividends…..

land, labor, capital……

…entrepreneurial ability

Product

Markets

Factor

Markets

goods & services…

….goods & services

….consumption spending….

….salaries, wages, rent, dividends…..

land, labor, capital……

…entrepreneurial ability

In a mixed economy its not always this

simple, something is missing.

The Government

Governments


Federal, State, & Local


Governments require
resources to provide
services


To purchase these
resources governments
collect taxes


Government spending
makes up 20% of GDP


Product

Markets

Factor

Markets

goods & services…

….goods & services

….consumption spending….

….salaries, wages, rent, dividends…..

land, labor, capital……

…entrepreneurial ability

Product

Markets

Factor

Markets

goods & services…

….goods & services

….consumption spending….

….salaries, wages, rent, dividends…..

land, labor, capital……

…entrepreneurial ability

Personal Income Taxes

Corporate Income Taxes

Product

Markets

Factor

Markets

goods & services…

….goods & services

….consumption spending….

….salaries, wages, rent, dividends…..

land, labor, capital……

…entrepreneurial ability

Personal Income Taxes

Corporate Income Taxes

transfer payments

subsidies

Product

Markets

Factor

Markets

goods & services…

….goods & services

….consumption spending….

….salaries, wages, rent, dividends…..

land, labor, capital……

…entrepreneurial ability

Personal Income Taxes

Corporate Income Taxes

transfer payments

subsidies

Any Questions?

Are you sure???

Product
Market

Business
Sector

Gov’t

Sector

Consumer
Sector

Factor
Market

1.
Land
[
natural resources
]


[
“gifts of nature
”]





.

The
Four

Factors
of

Production



Gifts

of
Nature
´

Water

Wind

Sun

Fossil fuels

.

2.
Labor

[
human resources
]


anyone who works [
“paid work”
]

A.
Physical



pro athletes & lumberjacks

B.

Intellectual



accountants & lawyers


Hired Help


.

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]



.

Real
Capital

v.

Financial

Capital

Notes...

INVESTMENT

FINANCIAL

CAPITAL

[stocks, bonds, & money]

REAL

CAPITAL

[tools, machinery, & factories]

Can

produce something

directly with these

Can’t

produce anything

directly with these

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].



Rent Wages Interest Profits

Land Labor Capital Entrepreneur

.

The
Harley Hog

Circular Flow

Product Market

Resource Market

Hog
CIRCULAR FLOW MODEL

BUSINESSES

HOUSEHOLDS

PRODUCT MARKET

Mechanic

RESOURCE MARKET

1

2

3

4

Flow 4. Goods/services

Flow 3: C
onsumer expenditures

Hog

CIRCULAR FLOW
MODEL

BUSINESSES

HOUSEHOLDS

PRODUCT MARKET

Mechanic

RESOURCE MARKET

1

2

3

4

Flow 4. Goods/services

Flow 3: C
onsumer expenditures

Flow 1:
L
and,

L
abor,
C
apital,
E
ntrepreneur

Flow 2:
R
ent, Wages, Interest, Profits

CIRCULAR FLOW
MODEL

BUSINESSES

HOUSEHOLDS

PRODUCT MARKET

Householders demand hogs & will pay

Mechanic

RESOURCE MARKET

Businesses
supply

hogs g/s

I demand that hog & will pay.

BUSINESSES

HOUSEHOLDS

RESOURCE

MARKET

PRODUCT

MARKET

GOODS &

SERVICES

GOODS &

SERVICES

$
CONSUMPTION

$
REVENU
E

Resource Market

Mechanic

Businesses

Show me the money!

& you’ll get this hog.

CIRCULAR FLOW MODEL

Householders

BUSINESSES

HOUSEHOLDS

RESOURCE

MARKET

PRODUCT

MARKET

GOODS &

SERVICES

GOODS &

SERVICES

$
CONSUMPTION

$
REVENU
E

Resource Market

Mechanic

Householders

Businesses

I demanded this hog and
had to pay for it.

Show me the money!

& you’ll get this hog.

CIRCULAR FLOW MODEL

BUSINESSES

HOUSEHOLDS

RESOURCE

MARKET

PRODUCT

MARKET

GOODS &

SERVICES

GOODS &

SERVICES

$
CONSUMPTION

$
REVENU
E

Resource Market

Mechanic

Householders

HH
supply hog labor

H.D.
demands hog labor & will

pay

Businesses

Show me the money!

& you’ll get this hog.

I demanded this hog and
had to pay for it.

CIRCULAR FLOW MODEL

HOUSEHOLDS

$
COSTS

$
INCOMES

GOODS &

SERVICES

GOODS &

SERVICES

PRODUCT MARKET

Resource

Market

BUSINESSES

Give me
your
hog labor
&
I’ll show you the money.

CIRCULAR FLOW MODEL

HOUSEHOLDS

$
COSTS

$
INCOMES

GOODS &

SERVICES

GOODS &

SERVICES

PRODUCT MARKET

Resource

Market

BUSINESSES

CIRCULAR FLOW MODEL

I supplied hog labor
& was paid..

BUSINESSES

HOUSEHOLDS

RESOURCE

MARKET

RESOURCES

INPUTS

$ COSTS

$ INCOMES

PRODUCT

MARKET

GOODS &

SERVICES

GOODS &

SERVICES

$ CONSUMPTION

$ REVENUE

CIRCULAR FLOW MODEL

The Circular
-
Flow Diagram

Businesses

Product Market

Resource Market

Households

1

2

3

4

Labor

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

3

The Circular
-
Flow Diagram

Households

Product Market

Resource Market

2

3

4

What flow are the following?

A. Goods/services?

B. Consumer expenditures?

C. Land, labor, capital and


entrepreneurial ability?

D.
Rent, wages, interest,


and profits?


Businesses

1

4

3

1

2

NS 56
-
59

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


demanders

and (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


products

goods/services
to (householders/businesses).

Fuzzy Wuzzy