Households and Firms Participants = households & firms Households: a psn or group of ppl living in a single residence Own FOP Firm (business): organization.

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Presentation transcript:

Households and Firms Participants = households & firms Households: a psn or group of ppl living in a single residence Own FOP Firm (business): organization that uses resources to produce a product or service, which it then sells transform inputs (factors of production) into outputs (goods/services)

Circular Flow Model of a Market Economy Visual representation of exchanges that take place in a free market economy Shows how households and firms exchange money, resources, and products

Factor Markets (Resource Markets) Lower half of circular model Firms purchase factors of production from households (factor market) Purchase or rent land Hire workers, pay wages/salaries Borrow $ from households to pay capital

Product Market Top half of circular flow model Households buy goods and services that firms produce (product market)

The Self-Regulating Nature of the Market Place The Wealth of Nations Adam Smith: both the buyer and seller consider only their self-interest. Self-interest = motivating force in free market Positive incentive of lower prices = buying of more goods

The Invisible Hand Self-interest and competition regulate the market economy Laissez-Faire government Market is self-regulating and supply & demand = the invisible hand Coined by Adam Smith

Incentives

Circular Flow Model of a Mixed Economy

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