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

Economic Models Economists use models to simplify our world Allows for economic analysis to occur The 2 most basic economic models are: Circular Flow Diagram Production Possibilities Frontier (PPF)

2 Sides of a Market Economy Consumers decide what to BUY! Producers decide what to SELL (MAKE) HOUSEHOLDS FIRMS

Product & Factor Markets Product Market: where any good or service is sold to consumers Factor Market: where factors of production are exchanged 4 Factors of Production: Land- all basic natural resources Labor- human work Capital- (physical, human) goods used in production of goods Entrepreneurship- managerial ability & risk taking

The circular flow describes how goods, services and money flow through a free market economy PRODUCT MARKET Revenue Spending Goods and services sold Goods and services bought HOUSEHOLDS FIRMS Rent is paid for Land Wages is paid for Labor Profit is paid to Entrepreneurs FACTOR MARKET Factors of production Labor, land, capital & entrepreneurship Wages, rent, and profit Income = Flow of inputs and outputs = Flow of dollars

Economists often Disagree Are tax cuts good or bad? Do Large Deficits raise interest rates? Is our Trade Deficit Dangerous? The answer to most economic questions is: IT DEPENDS!

Business Cycle Historically every economy moves through cycles

Alphabet Recoveries http://www.pbs.org/newshour/video/share-ms.html?s=news01p793 Video #85

Current Economics Reading Where is the U.S. today in the Business Cycle?

Business Cycle ? 2000 2006 1990’s Technology Boom Housing Bubble 2001 2006 Housing Bubble 2008-09 2012 Great Recession ?

Business Cycle Graphing Economic History 1980-2009

Long Term Growth Rate