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Circular Flow Chart of a Pure Market Economy©2012, TESCCC
Objectives Analyze a circular flow model of a pure market economy.Explain how you act as both a buyer and a seller. Explain the economic interdependence of this model. ©2012, TESCCC
2 Sector Circular Flow ModelOur two sectors are : 1. Households 2. Business Firms ©2012, TESCCC
Product Market Resource Market Products = Goods & Services$$$ Consumer Expenditures $$$$ Households Businesses $$$$ Nat’l Income = Rent, Wages, Interest, Profit Resources = Land, Labor, Capital, Entrepreneurship Resource Market ©2012, TESCCC
Two Sectors Households Businesses
Households Households are the owners of the resources, land, labor and capital. Households become the entrepreneurs. They sell these resources to the business firms. ©2012, TESCCC
Resource Market Households BusinessesResources = Land, Labor, Capital, Entrepreneurship Resource Market ©2012, TESCCC
Business Firms Business firms make money payments back to households for the resources. This makes up what we call national income. ©2012, TESCCC
Resource Market Households Businesses$$ Nat’l Income = Rent, Wages, Interest, Profit $$ Resources = Land, Labor, Capital, Entrepreneurship Resource Market
Resource Market This exchange of resources for income payments takes place in what we call the resource market. Households are the sellers and business firms are the buyers. ©2012, TESCCC
Business firms Business firms take the resources and turn them into products. A product can be a good or a service. They then sell the products to the households. ©2012, TESCCC
Product Market Products =Goods & Services Households Businesses©2012, TESCCC
Households Households use the income they earned from selling resources to purchase these products. This is called consumer expenditures. ©2012, TESCCC
Product Market Products =Goods & Services $$$ Consumer Expenditures $$Households Businesses ©2012, TESCCC
Product Market This exchange of products for consumer expenditures takes place in the product market. The business firm is the seller and households are the buyers. ©2012, TESCCC
Product Market Resource Market Products=Goods & Services$$ Consumer Expenditures $$ Households Businesses Nat’l Income = Rent, Wages, Interest, Profit Resources = Land, Labor, Capital, Entrepreneurship Resource Market ©2012, TESCCC
Real Flow This is the flow of resources from household to business firms and the flow of finished products from business firms to households. ©2012, TESCCC
Product Market Resource Market Products =Goods & Services HouseholdsBusinesses Resources = Land, Labor, Capital, Entrepreneurship Resource Market ©2012, TESCCC
Money Flow This is the money from business firms to households as income. From households to business firms it is consumer expenditures, consumers buying products. ©2012, TESCCC
Product Market Resource Market $$ Consumer Expenditures $$ HouseholdsBusinesses Nat’l Income = Rent, Wages, Interest, Profit $$ Resource Market ©2012, TESCCC
Product Market Resource Market Products =Goods & Services$$ Consumer Expenditures $$ Households Businesses $$ $$$ Nat’l Income = Rent, Wages, Interest, Profit Resources = Land, Labor, Capital, Entrepreneurship Resource Market ©2012, TESCCC
(rent, wages, interest, profit)Resource Market Buyers: Business Firms Sellers: Households Exchange: Factors of production (land, labor, capital and entrepreneurship) for National income (rent, wages, interest, profit) ©2012, TESCCC
Consumer ExpendituresProduct Market Buyers: Households Sellers: Business Firms Exchange: Goods & services for Consumer Expenditures part of GDP ©2012, TESCCC
How do government actions affect the CFM and how is the CFM affected by the rest of the world?©2012, TESCCC
Circular Flow of a Market Economy
Warm-Up/Review What is the difference between GDP/GNP? What are the two methods for measuring each? List the 3 Macroeconomic goals. What is the main purpose.
Vocabulary Economic Interdependence- Businesses, households, and the gov’t all depend on each other in order for the economy to run smoothly. Factor Market-
Session 3 Circular Flow Disclaimer: The views expressed are those of the presenters and do not necessarily reflect those of the Federal Reserve Bank of.
The Circular Flow Model
A Circular Flow Diagram
How money changes hands!. In the Circular Flow Model there are 2 groups: Households (the people) Firms (companies and businesses)
Activity 43 the factor market Determining the prices and quantities of inputs necessary for production.
Product Market: This market consists of households/individuals/ consumers Resource/Factor Market: consists of businesses/firms who produce goods and.
The Circular Flow Spending Goods and services bought Revenue Goods and services sold Labor, land, and capital Income = Flow of inputs and outputs.
The Simple Circular Flow Model
Circular Flow. Notice that goods & services and resources flow around the economy in one direction, while money flows around the economy in the opposite.
Circular Flow Model The Circular Flow Model describes and captures how the economy interacts with one another!!!
©2011 Cengage Learning. Chapter 2 REVIEW OF THE ECONOMIC PRINCIPLES OF CAPITALISM ©2011 Cengage Learning.
Circular Flow in a Market Economy
Product and Resource Markets
Lesson 6 Microeconomics.
Circular Flow Diagrams
Free Enterprise in the United States
Circular Flow in Economics
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