1. Circular Flow Model

2. Definition:
A simple chart or model of the exchange of good and services as well as production factors that generate revenue in an economy.
Never ending exchange between consumers and businesses.
More complex models involve imports and exports, government oversight and financial markets .

3. Consumers:
An individuals that purchase goods and services which in turn benefit the producers and the economy.
Consumers also provide insight to producers as to what and how much of a good to produce.
Consumers supply producers with means of production also known as labor

4. Producers:
Provide consumers with the good and services they need in order to function correctly.
Use consumer input to calculate how much product to produce to satisfy the needs of the consumer.
Anyone can be a producer whether your selling your car or having a garage sale for example.

5. There are seven assumptions that exist in the circular flow model
Those seven include:
The economy consists of two sectors.
Households spend all of their income.
All output produced by firms is purchased.
There is no financial sector.
There is no government sector.
There is no overseas sector.
It is a closed economy with no exports or imports.

6. Government:
The government also plays an important role in the economy.
The government serves as both a consumer and a producer in the circular flow model.
Producer Ex: the government produces services to the consumers such as public colleges, protective agencies such as the CIA and National Defense.
Consumer Ex: in order to supply services and goods to the economy, the government needs to purchase goods to make these services happen. Government agencies need transportation to provide their services so they need to purchase vehicles making them consumers in the economy.

7. How It Works
Businesses supply the government as well as the consumer goods and services. Businesses also provide households with income as well.
Households or consumers provide businesses with labor and payments so they can produce the goods. Consumers also supply the government with taxes and labor as well.
Government plays the role of both consumer and producer. It provides businesses service and payments. They also provide the consumers with income and services.

8. Sources: http://en.wikipedia.org/wiki/Circular_flow_of_income