Warm-up On a piece of paper, describe how you think individuals (consumers), businesses (producers), and the government interact with each other in todays 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 paymentssubsidies

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 paymentssubsidies

Any Questions? Are you sure???

Product Market Business Sector Govt Sector Consumer Sector Factor Market

1. Land [natural resources] – [gifts of nature]. The Four Factors of Production Gifts of Nature Gifts of Nature Water Wind Sun Fossil fuels

. 2. Labor [human resources] anyone who works [paid work] anyone who works [paid work] A. Physical – pro athletes & lumberjacks B. Intellectual – accountants & lawyers Hired Help Hired Help

. 3. Capital Resources – all man-made inputs used to produce consumer products (machinery, physical plants, & tools). consumer products (machinery, physical plants, & tools). A. Capital goods – goods [machinery, buildings, & tools] used to A. Capital goods – goods [machinery, buildings, & tools] used to produce other goods. [crane, Ford plant, hammer] 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 Cant produce anything directly with these

4. Entrepreneurship – Combines land, labor, & capital to produce products. produce products. Resource payments. The resource owners receive rent [for Resource payments. The resource owners receive rent [for the use of their land; wages [for their labor]; interest [payment the use of their land; wages [for their labor]; interest [payment for financial capital], and profits [for their entrepreneurial ability]. 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 Flow 4. Goods/services Flow 3: C onsumer expenditures

Hog CIRCULAR FLOW MODEL BUSINESSES HOUSEHOLDS PRODUCT MARKET Mechanic RESOURCE MARKET 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 RESOURCEMARKET PRODUCTMARKET GOODS & SERVICES SERVICES $CONSUMPTION $ REVENUE Resource Market Mechanic Businesses Show me the money! & youll get this hog. CIRCULAR FLOW MODEL Householders

BUSINESSES HOUSEHOLDS RESOURCEMARKET PRODUCTMARKET GOODS & SERVICES SERVICES $CONSUMPTION $ REVENUE Resource Market Mechanic Householders Businesses I demanded this hog and had to pay for it. Show me the money! & youll get this hog. CIRCULAR FLOW MODEL

BUSINESSES HOUSEHOLDS RESOURCEMARKET PRODUCTMARKET GOODS & SERVICES SERVICES $CONSUMPTION $ REVENUE Resource Market Mechanic Householders HH supply hog labor H.D. demands hog labor & will pay Businesses Show me the money! & youll get this hog. I demanded this hog and had to pay for it. CIRCULAR FLOW MODEL

HOUSEHOLDS $ COSTS $ INCOMES GOODS & SERVICES SERVICES PRODUCT MARKET Resource Market BUSINESSES Give me your hog labor & Ill show you the money. CIRCULAR FLOW MODEL

HOUSEHOLDS $ COSTS $ INCOMES GOODS & SERVICES SERVICES PRODUCT MARKET Resource Market BUSINESSES CIRCULAR FLOW MODEL I supplied hog labor & was paid..

BUSINESSES HOUSEHOLDS RESOURCEMARKET RESOURCESINPUTS $ COSTS $ INCOMES PRODUCTMARKET GOODS & SERVICES SERVICES $ CONSUMPTION $ REVENUE CIRCULAR FLOW MODEL

The Circular-Flow Diagram Businesses Product Market Resource Market Households Labor What flow are the following? A. Consumer expenditures? B. Goods and services? C. Land, labor, capital, and entrepreneurs? and entrepreneurs? D. Rent, wages, interest, and profits? and profits?

The Circular-Flow Diagram Households Product Market Resource Market What flow are the following? A. Goods/services? B. Consumer expenditures? C. Land, labor, capital and entrepreneurial ability? entrepreneurial ability? D.Rent, wages, interest, and profits? and profits? Businesses Businesses

NS In the product market (householders/businesses) are the demanders and (householders/businesses) are the suppliers. demanders and (householders/businesses) are the suppliers. 57. In the resource market (householders/businesses) are the demanders and (householders/businesses) are the suppliers. demanders and (householders/businesses) are the suppliers. 58. In the resource market, (householders/businesses) sell resources to (householders/businesses). sell resources to (householders/businesses). 59. In the product market, (householders/businesses) sell products goods/services to (householders/businesses). products goods/services to (householders/businesses). Fuzzy Wuzzy