1. Circular Flow & Business Cycle
AP Macroeconomics
Circular Flow & Business Cycle
How the U.S. Economy works

2. Circular Flow Chart Consumers decide what to BUY!
The circular flow describes how goods, services and money flow through a free market economy
Consumers decide what to BUY!
Producers decide what to SELL (produce))
Demand Curve
HOUSEHOLDS
Supply Curve
FIRMS

3. 5 Factors of Production Resources used to make goods & services
1) Land- all basic natural resources
2) Labor- human work/labor
3) Physical Capital- previously produced goods
4) Human Capital education, skills, etc…
5) Entrepreneurship- managerial ability & risk taking
To open a coffee shop:
Labor = worker
Physical Capital =
Coffee Machine
Land = Beans, store, etc…
Human Capital =
Skills of workers
Entrepreneurship- = Skills of owners

4. Product & Factor Markets
Product Market:
where any good or service is sold
Factor Market:
where factors of production are exchanged
Consumers are demand in product market
Producers are demand in factor market

5. Circular flow Chart FIRMS End Result: HOUSEHOLDS PRODUCT MARKET MARKET
Revenue
Spending
Goods
& services
sold
Goods and
services
bought
End Result:
HOUSEHOLDS
FIRMS
Rent is paid for Land
Wages is paid for Labor
Profit is paid to Entrepreneurs
FACTOR
MARKET
Factors of
production
Labor, land,
capital & entrepreneurship
Wages, rent,
and profit
Income
= Flow of inputs
and outputs
= Flow of dollars

6. Business Cycle Historically every economy moves through cycles . .
Peak
Expansion
Contraction
Trough
Expansion
Time
GDP

7. Circular Flow & Business Cycle Worksheet

8. Review: The circular flow
PRODUCT
MARKET
Revenue
Spending
Goods
& services
sold
Goods and
services
bought
Europe grows faster
2) Stock market falls -25%
3) Interest rates rise 0.0% to 0.5%
HOUSEHOLDS
FIRMS
FACTOR
MARKET
Factors of
production
Labor, land,
capital & entrepreneurship
Wages, rent,
and profit
Income
= Flow of inputs
and outputs
= Flow of dollars

9. Business Cycle & Circular Flow
Review
Business Cycle & Circular Flow
Time
GDP
Peak
Expansion
Contraction
Trough
Expansion
U.S. Economy needs +125,000 new Jobs
each month to keep unemployment unchanged!
Only GDP > 2.0% lowers unemployment

10. Economists often Disagree
Do tax cuts lead to more long run economic growth?
Does large Gov’t debt eventually lead to a financial crisis?
Will raising the minimum wage lead to significant job loss?
The answer to most economic questions is:
IT DEPENDS!

11. = GDP adjusted for inflation
2014 = + 2.4%
2015 = + 2.1%
2013 = + 1.5%
2012 = + 2.2%
1st six months of 2016 = + 1.0%

12. Alphabet Economic Recoveries
First Video
Second Video