Circular Flow Chart of a Pure Market Economy
- Slides: 24
Circular Flow Chart of a Pure Market Economy © 2012, TESCCC
Objectives 1. Analyze a circular flow model of a pure market economy. 2. Explain how you act as both a buyer and a seller. 3. Explain the economic interdependence of this model. © 2012, TESCCC
2 Sector Circular Flow Model Our two sectors are : 1. Households 2. Business Firms © 2012, TESCCC
Product Market Products = Goods & Services $$$ Consumer Expenditures $$$$ Households Businesses $$$$ Nat’l Income = Rent, Wages, Interest, Profit Resources = Land, Labor, Capital, Entrepreneurship Resource Market © 2012, TESCCC
Two Sectors Households Businesses © 2012, TESCCC 4
Households • Households are the owners of the resources, land, labor and capital. Households become the entrepreneurs. They sell these resources to the business firms. 5 © 2012, TESCCC
Households Businesses Resources = Land, Labor, Capital, Entrepreneurship Resource Market © 2012, TESCCC
Business Firms • Business firms make money payments back to households for the resources. This makes up what we call national income. © 2012, TESCCC
Households Businesses $$ Nat’l Income = Rent, Wages, Interest, Profit $$ Resources = Land, Labor, Capital, Entrepreneurship Resource Market © 2012, TESCCC 8
Resource Market • This exchange of resources for income payments takes place in what we call the resource market. Households are the sellers and business firms are the buyers. 9 © 2012, TESCCC
Business firms • Business firms take the resources and turn them into products. A product can be a good or a service. They then sell the products to the households. © 2012, TESCCC
Product Market Products =Goods & Services Households Businesses © 2012, TESCCC
Households • Households use the income they earned from selling resources to purchase these products. This is called consumer expenditures. © 2012, TESCCC
Product Market Products =Goods & Services $$$ Consumer Expenditures $$ Households Businesses © 2012, TESCCC
Product Market • This exchange of products for consumer expenditures takes place in the product market. The business firm is the seller and households are the buyers. © 2012, TESCCC
Product Market Products=Goods & Services $$ Consumer Expenditures $$ Households Businesses Nat’l Income = Rent, Wages, Interest, Profit Resources = Land, Labor, Capital, Entrepreneurship Resource Market © 2012, TESCCC
Real Flow • This is the flow of resources from household to business firms and the flow of finished products from business firms to households. © 2012, TESCCC
Product Market Products =Goods & Services Households Businesses Resources = Land, Labor, Capital, Entrepreneurship Resource Market © 2012, TESCCC
Money Flow • This is the money from business firms to households as income. From households to business firms it is consumer expenditures, consumers buying products. © 2012, TESCCC
Product Market $$ Consumer Expenditures $$ Households Businesses Nat’l Income = Rent, Wages, Interest, Profit $$ Resource Market © 2012, TESCCC
Product Market Products =Goods & Services $$ Consumer Expenditures $$ Households $$ Businesses $$$ Nat’l Income = Rent, Wages, Interest, Profit Resources = Land, Labor, Capital, Entrepreneurship Resource Market © 2012, TESCCC
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
Product 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 http: //tutor 2 u. net/economics/content/topics/macroeconomy/circular_flow. htm 23