The Circular Flow of Economic Activity Economics Unit

The Circular Flow of Economic Activity Economics Unit 2

The Circular Flow Our economy is an enormous, constant cycle in which Goods, Services, Resources, and money flow back and forth. Economists refer to this as the Circular Flow of Economic Activity Economic Interdependence Businesses (Producers), households (Individuals), and the government depend on each other in order for the economy to run smoothly.

Circular Flow Model Households are where you find regular people who work and consume in our economy

Circular Flow Model Households Firms are the businesses that produce, employ us, and purchase in our economy

Circular Flow Model Factor Market The factor market is where the four factors of production are bought and sold. Households Firms

The Factor Market Production Resources Factor Market Households contribute their land, labor, skills, and capital to the factor marker. Households Firms

Circular Flow Model Production Resources Factor Market Four Factors Those things are put to use in firms. Households Firms

The Product Market Production Resources Factor Market Four Factors The product market is where firms sell their goods and services and people buy them. Households Firms Product Market

Circular Flow Model Production Resources Households Factor Market Four Factors Firms send those goods and services into the market. Product Market Firms Goods and Services To Be Sold

Circular Flow Model Production Resources Households Factor Market Goods & services purchased by households. Purchased Goods and Services Product Market Four Factors Firms Goods and Services To Be Sold

Circular Flow Model Production Resources Households Purchased Goods and Services Factor Market Four Factors Production Costs Firms put money back into the factor market in the form of capital, wages, salaries, and other costs of production resources Product Market Firms Goods and Services To Be Sold

Circular Flow Model Factor Market Production Resources Income Households money paid to individuals by businesses becomes household income Purchased Goods and Services Product Market Four Factors Production Costs Firms Goods and Services To Be Sold

Circular Flow Model Factor Market Production Resources Income Four Factors Production Costs When households spend this money on goods and services it is known as consumer spending Households Consumer Spending Purchased Goods and Services Firms Product Market Goods and Services To Be Sold

Production Resources Income Factor Market Four Factors Production Costs And businesses earn revenue. Households Consumer Spending Purchased Goods and Services Firms Product Market Revenue Goods and Services To Be Sold

Circular Flow Model Production Resources Income Factor Market Production Resources Four Factors Production Costs Govt Spending Transfer Payments Govt Subsidies Taxes Govt Services Households Firms Goods & Services Consumer Spending Purchased Goods and Services Govt Spending Product Market Revenue Goods and Services To Be Sold

Circular Flow Model

A Simplified Version RESOURCES WAGES AND SALARIES Households Businesses EXPENDITURES FINISHED GOODS

REFLECTION ► What is economic interdependence? ► What three elements depend on one another for economic interdependance? ► What role do households play in the economy? ► What role do firms play in the economy? ► What role does the government play in the economy?