The Circular Flow of Economic Activity Economics Unit 2

The Circular Flow Our economy is an enormous, constant cycle in which Goods, Services, Resources, and money flow back and forth. Economists refer to this as the Circular Flow of Economic Activity Economic Interdependence Businesses (Producers), households (Individuals), and the government depend on each other in order for the economy to run smoothly.

Circular Flow Model Households are where you find regular people who work and consume in our economy

Circular Flow Model Households Firms are the businesses that produce, employ us, and purchase in our economy

Circular Flow Model Factor Market The factor market is where the four factors of production are bought and sold. Households Firms

The Factor Market Factor Market Production Resources Factor Market Households contribute their land, labor, skills, and capital to the factor marker. Households Firms

Those things are put to use in firms. Circular Flow Model Production Resources Factor Market Four Factors Those things are put to use in firms. Households Firms

The Product Market Factor Market Product Market Production Resources Factor Market Four Factors The product market is where firms sell their goods and services and people buy them. Households Firms Product Market

Firms send those goods and services into the market. Circular Flow Model Production Resources Factor Market Four Factors Firms send those goods and services into the market. Households Firms Product Market Goods and Services To Be Sold

Purchased Goods and Services Circular Flow Model Production Resources Factor Market Four Factors Goods & services purchased by households. Households Firms Product Market Goods and Services To Be Sold Purchased Goods and Services

Purchased Goods and Services Circular Flow Model Production Resources Factor Market Four Factors Production Costs Firms put money back into the factor market in the form of capital, wages, salaries, and other costs of production resources Households Firms Product Market Purchased Goods and Services Goods and Services To Be Sold

Purchased Goods and Services Circular Flow Model Production Resources Factor Market Four Factors Income Production Costs money paid to individuals by businesses becomes household income Households Firms Product Market Purchased Goods and Services Goods and Services To Be Sold

Purchased Goods and Services Circular Flow Model Production Resources Factor Market Four Factors Income Production Costs When households spend this money on goods and services it is known as consumer spending Households Firms Consumer Spending Product Market Purchased Goods and Services Goods and Services To Be Sold

Purchased Goods and Services Production Resources Factor Market Four Factors Income Production Costs And businesses earn revenue. Households Firms Consumer Spending Revenue Product Market Purchased Goods and Services Goods and Services To Be Sold

Purchased Goods and Services Circular Flow Model Production Resources Factor Market Four Factors Income Production Costs Production Resources Govt Spending Transfer Payments Govt Subsidies Taxes Taxes Govt Services Govt Services Households Firms Goods & Services Govt Spending Consumer Spending Revenue Product Market Purchased Goods and Services Goods and Services To Be Sold

Circular Flow Model

A Simplified Version RESOURCES WAGES AND SALARIES Households Businesses EXPENDITURES FINISHED GOODS

REFLECTION What is economic interdependence? What three elements depend on one another for economic interdependance? What role do households play in the economy? What role do firms play in the economy? What role does the government play in the economy?