AP Macroeconomics Circular Flow Business Cycle How the

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

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

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

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

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

Business Cycle Historically every economy moves through cycles Trough Time pa ns ion Ex Expa ns tion trac Con GDP ion Peak .

Circular Flow & Business Cycle Worksheet

Review: The circular flow Revenue 1) Europe grows faster 2) Stock market falls -25% Goods & services sold PRODUCT MARKET FIRMS Spending Goods and services bought HOUSEHOLDS 3) Interest rates rise 0. 0% to 0. 5% Factors of production Wages, rent, and profit FACTOR MARKET Labor, land, capital & entrepreneurship Income = Flow of inputs and outputs = Flow of dollars

Review Business Cycle & Circular Flow . pa n . Ex Expa ns tion trac Time Trough sio n Con ion GDP Peak U. S. Economy needs +125, 000 new Jobs each month to keep unemployment unchanged! Only GDP > 2. 0% lowers unemployment

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!

= GDP adjusted for inflation 2014 = + 2. 4% 2013 = + 1. 5% 2012 = + 2. 2% 1 st six months of 2016 = + 1. 0% 2015 = + 2. 1%

Alphabet Economic Recoveries First Video 2009 • http: //www. youtube. com/watch? v=d 0 nvo. QL 4 By 8 • Second Video 2011 https: //www. youtube. com/watch? v=VDa. KCBe-380