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

2. Economic Models Economists use models to simplify our world
used for economic analysis of “real world”
Based on various assumptions
The 2 most basic economic models are:
Circular Flow Diagram
Production Possibilities Frontier (PPF)

3. 2 Sides of a Market Economy
Consumers decide what to BUY!
Producers decide what to SELL (MAKE)
HOUSEHOLDS
Demand Curve
FIRMS
Supply Curve

4. 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

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

6. The circular flow describes how goods, services and money flow through a free market economy
PRODUCT
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

7. Circular Flow Questions

8. 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!

9. Business Cycle
Historically every economy moves through cycles

10. Alphabet Economic Recoveries
First Video
Second Video

11. Business Cycle
Graphing Economic History

12. Business Cycle ? 2000 2006 Dot.com Collapse 1990’s Technology Boom
2001
2006
Housing Bubble
Dot.com Collapse
2013
Great Recession ?

13. Current Economics Reading
Where is the U.S. today in the Business Cycle?

14. Youth Unemployment

16. Free Market Failures
Market Failure occurs whenever a market does not allocate resources efficiently
Examples:
1) Collusion/Price Fixing – companies limiting supply and/or fixing prices
2) Externalities – when producers do not pay for ALL costs of production
Government should correct market failures through new policies
examples: cap & trade policies for pollution, taxing fuel inefficient cars
enforcing anti-trust laws (ex: denying the ATT & T-Mobile proposed merger)

17. Branches of Economics
Microeconomics looks at individual parts of economy:
How households & firms make decisions and interact in specific markets
Macroeconomics looks at the entire economy:
Economy-wide phenomena including: inflation, unemployment, interest rates & GDP (economic growth) 13