AS Economics Ch 12: The Circular Flow of Income Model AS Economics Ch 12: The Circular Flow of Income Model.

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Presentation transcript:

AS Economics Ch 12: The Circular Flow of Income Model AS Economics Ch 12: The Circular Flow of Income Model

The Boom/Bust Cycle

FIRMS (suppliers of goods and services, demanders of factor services) HOUSEHOLDS (demanders of goods and services, suppliers of factor services) The interdependence of goods and factor markets

Q1Q1 P1P1 QF2QF2 PF2PF2 Q2Q2 P2P2 PF1PF1 QF1QF1 D2D2 D2D2 P Q P Q£ £ ££ Factor services Goods Factor services S S D1D1 D1D1 (1) Consumer demand (1) Consumer demand (4) Factor supply (4) Factor supply (3) Factor demand (3) Factor demand (2) Producer supply (2) Producer supply O O

Factor payments Factor payments Consumption of domestically produced goods and services (C d ) Consumption of domestically produced goods and services (C d ) The circular flow of income Firms Households

Factor payments Factor payments Consumption of domestically produced goods and services (C d ) Consumption of domestically produced goods and services (C d ) Investment (I) Government expenditure (G) Government expenditure (G) Export expenditure (X) Export expenditure (X) BANKS, etc Net saving (S) Net saving (S) GOV. Net taxes (T) Net taxes (T) ABROAD Import expenditure (M) Import expenditure (M) The circular flow of income WITHDRAWALS INJECTIONS

The Importance of Consumption n Private consumption expenditure account for about 60% of the AD n Changes in Consumption < The wealth effect < Inflation expectations < The rate of interest < Expectation