Circular Flow & Business Cycle AP Macroeconomics Circular Flow & Business Cycle How the U.S. Economy works

Circular Flow Chart Consumers decide what to BUY! The circular flow describes how goods, services and money flow through a free market economy Consumers decide what to BUY! Producers decide what to SELL (produce)) Demand Curve HOUSEHOLDS Supply Curve FIRMS

5 Factors of Production Resources used to make goods & services 1) Land- all basic natural resources 2) Labor- human work/labor 3) Physical Capital- previously produced goods 4) Human Capital education, skills, etc… 5) Entrepreneurship- managerial ability & risk taking To open a coffee shop: Labor = worker Physical Capital = Coffee Machine Land = Beans, store, etc… Human Capital = Skills of workers Entrepreneurship- = Skills of owners

Product & Factor Markets Product Market: where any good or service is sold Factor Market: where factors of production are exchanged Consumers are demand in product market Producers are demand in factor market

Circular flow Chart FIRMS End Result: HOUSEHOLDS PRODUCT MARKET MARKET Revenue Spending Goods & services sold Goods and services bought End Result: HOUSEHOLDS FIRMS Rent is paid for Land Wages is paid for Labor Profit is paid to Entrepreneurs FACTOR MARKET Factors of production Labor, land, capital & entrepreneurship Wages, rent, and profit Income = Flow of inputs and outputs = Flow of dollars

Business Cycle Historically every economy moves through cycles . . Peak Expansion Contraction Trough Expansion Time GDP . .

Circular Flow & Business Cycle Worksheet

Review: The circular flow PRODUCT MARKET Revenue Spending Goods & services sold Goods and services bought Europe grows faster 2) Stock market falls -25% 3) Interest rates rise 0.0% to 0.5% HOUSEHOLDS FIRMS FACTOR MARKET Factors of production Labor, land, capital & entrepreneurship Wages, rent, and profit Income = Flow of inputs and outputs = Flow of dollars

Business Cycle & Circular Flow Review Business Cycle & Circular Flow Time GDP Peak Expansion Contraction Trough Expansion . . U.S. Economy needs +125,000 new Jobs each month to keep unemployment unchanged! Only GDP > 2.0% lowers unemployment

Economists often Disagree Do tax cuts lead to more long run economic growth? Does large Gov’t debt eventually lead to a financial crisis? Will raising the minimum wage lead to significant job loss? The answer to most economic questions is: IT DEPENDS!

= GDP adjusted for inflation 2014 = + 2.4% 2015 = + 2.1% 2013 = + 1.5% 2012 = + 2.2% 1st six months of 2016 = + 1.0%

Alphabet Economic Recoveries First Video 2009 http://www.youtube.com/watch?v=d0nvoQL4By8 Second Video 2011 https://www.youtube.com/watch?v=VDaKCBe-380