The Circular Flow of Income

The circular flow of income The interdependence of goods markets and factor markets

FIRMS (providers of goods and services, buyers of factor services) HOUSEHOLDS (buyers of goods and services, providers 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 (2) Consumer demand (2) Consumer demand (4) Factor supply (4) Factor supply (3) Factor demand (3) Factor demand (1) Producer supply (1) Producer supply

The circular flow of income Consumption, injections, withdrawals and equilibrium

Factor payments Factor payments Consumer spending on domestically produced goods and services (C) Consumer spending on domestically produced goods and services (C) The circular flow of income Firms Households

Factor payments Factor payments Consumer spending on domestically produced goods and services (C) Consumer spending on domestically produced goods and services (C) Investment Government expenditure Government expenditure Export receipts Export receipts BANKS, etc Net saving Net saving GOV. Net taxes Net taxes Overseas Import payments Import payments The circular flow of income WITHDRAWALS INJECTIONS

Factor payments Factor payments Consumer spending on domestically produced goods and services (C) Consumer spending on domestically produced goods and services (C) Investment Government expenditure Government expenditure Export expenditure Export expenditure BANKS, etc Net saving Net saving GOV. Net taxes Net taxes Overseas Import expenditure Import expenditure The circular flow of income WITHDRAWALS INJECTIONS

BANKS, etc GOV. Overseas The circular flow of income

Aggregate Supply Aggregate Demand

The circular flow of income Aggregate Supply Change in Stocks: unintended investment of output that has not yet sold