Circular Flow of Economic Activity Macdonald Economics Circular

Circular Flow of Economic Activity Macdonald Economics

Circular Flow of Economic Activity • What two groups are responsible for most action in the economy? • Individuals & Businesses • Move to your assigned area of the room

FACTOR MARKETS • What is it that businesses demand from people? • Labor, Money, Land = Factors of Production • Those exchanges take place in the FACTOR MARKET

PRODUCT MARKETS • What is it that individuals want from businesses? • Products (Goods ) and Services • Those exchanges take place in the Product Markets

Circular Flow of Economic Activity • What is the goal of the businesses? • Make the most money or maximize profits in the Product Markets and minimize costs in the Factor Markets • What is the goal of individuals? • Make the most money in Factor Markets by selling labor, etc. for a high cost and maximize what they can get for little money in the Product Market

Circular Flow of Economic Activity • Who starts with the money? • ENTREPRENUERS or businesses owners

Circular Flow of Economic Activity • Each entrepreneur has an amount of money to produce a good or service. • Entrepreneurs count your money • You need laborers and raw materials. Where do you get them? • In order to get finished Goods or Services to sell in the market, you need LAND, LABOR, and CAPITAL.

FACTOR MARKET STAGE Businesses have five minutes to visit individuals and acquire as many factors or production as you can. Try to spend all your money. Remember you need an EQUAL AMOUNT OF LAND, LABOR and CAPITAL. Shop around until you are sure you can get the most for your money. Individuals: Bargain as you wish to sell your resources for the most money possible.

THE FACTORY • Individuals – Go “HOME” and count your income to determine how much you can spend on goods and services • Businesses – Go to the FACTORY (Me) and exchange each packet of LAND, LABOR, CAPITAL for one GOOD AND SERVICE to sell later.

PRODUCT MARKET STAGE • Remember, Individuals want to buy as much with as little as they can and businesses want to sell as much as they can for high costs. • Both parties now have five minutes to buy and sell. Individuals shop around for the best deal.

Review Questions 1. What exactly “flows” in the circular flows? 2. How does money spent by businesses in one market end up being earned by businesses in the other market? 3. What are the objectives of businesses? 4. What are the objectives of individuals?

Review Questions 5. Did you either have resources (land, labor, capital) you couldn’t sell if you were an individual or resources you couldn’t use if you were a business? 6. Would it be possible that households might have money to left to spend, but businesses will be sold out of goods and services? How could that happen?

Review Questions 7. Why did some households end up with more goods and services than others? Why did some firms end up with higher profits than others? 8. What might happen if the amount of money was cut in half at the beginning? Why?