Chapter 2 Circular Flow Model

1. Household- individual or family unit that occupy a single home & have common living expenses. a. What do they exchange with businesses? they receive income in exchange for labor in the form of a wage. As consumers, households make expenditures to businesses for which they receive goods and services.

b.What do they pay to the government? households pay taxes. c.What do they get from the government? they receive public goods and services, low income households receive transfer payments. Transfer payments redistribute wealth through programs like welfare.

2. Businesses/Firms-individuals work together to produce a good or service. a. What do businesses exchange with households? From households-get labor for which they pay wages- are consumers & producers b.What do businesses exchange with the government? pay taxes and get subsidies c. What is a subsidy? a payment to a business firm that cannot profit on its own. May be given b/c the firm is vital to nat’l security, or significant for the country, or essential for economic health.

3. Government- limited role in the US. a.How does the government get income? Takes in money for taxes (income, property, user fees, tariffs, sales taxes) b.What are government expenditures? Transfer payments and subsidies and providing public goods and services. c.What is a public good? It is not able to be depleted and cannot be easily denied to people b/c of non-payment like roadways.

Markets in the Circular Flow Model What is the factors (Resource) market? The market for resources like land, labor, capital to be used in production. What is the products market? Where goods are sold for consumption by end-users.

1. Distinguish between product and factor markets. 2. Using the information you have learned, write a paragraph on "you as a labor unit." What do you have to offer to the factor market that will help you get what you want out of life? How, specifically, can you increase your value in the factor market

Businesses provide the government with A. taxes and goods and services. B. taxes and labor. C. services and income 2) Businesses receive _____ and ____ from the government. taxes and goods and services services and payments taxes and labor 3) Households provide businesses with labor and payments. services and income. taxes and goods and services. 4) Businesses provide households with taxes and income. income and goods and services