The Simple Circular Flow Model Analysis of: The Simple Circular Flow Model

Objective: Analyze the simple circular flow model to detect relationships among its: sectors markets flows

The Circular Flow Model Goods and Services Payments for Goods and Services (Product Market) Business Firms Consumer Households (Factor or Resource Market) Payments (RWIP) for Factors of Production (Factors of Production (land, labor ,capital, entrepreneurship)

The assumptions of the Circular Flow Model (CFM) are the characteristics of capitalism.

All of the following are assumptions of the circular flow model, EXCEPT: Economic freedom Private property Economic incentives (profit motive) Competitive markets A price system based on supply and demand Involuntary exchanges Limited government

A capitalist (free enterprise) system is based on voluntary (free) exchanges rather than involuntary (forced) exchanges. Voluntary exchanges are necessary to ensure a competitive marketplace. Consumers are not forced to purchase from a single seller -- they are free to choose from among many sellers of the same product or service.

Identification of the components of the Circular Flow Model Sectors Markets Flows

Click separately on the two major sectors of the CFM. Goods and Services Payments for Goods and Services (Product Market) Business Firms Consumer Households (Factor or Resource Market) Payments (RWIP) for Factors of Production (Factors of Production (land, labor ,capital, entrepreneurship)

In a simple circular flow model (CFM) exchanges take place between the two major sectors: Business firms (want to sell goods and services and purchase factors of production) Consumer households (want to purchase goods and services and sell their factors of production)

Exchanges take place between business firms and consumer households in the MARKETS of the economy. Analyze the model below to identify the two markets of the CFM: Goods and Services Payments for Goods and Services (Product Market) Business Firms Consumer Households (Factor or Resource Market) Payments (RWIP) for Factors of Production (Factors of Production (land, labor ,capital, entrepreneurship)

Exchanges that occur between sectors in the CFM are called “flows of economic activity.” In each market there is a MONEY FLOW (payment) And a REAL FLOW (good, service or factor of production for which a payment is made)

Click the flow that represents the money flow in the product market Goods and Services Payments for Goods and Services (Product Market) Business Firms Consumer Households (Factor or Resource Market) Payments (RWIP) for Factors of Production (Factors of Production (land, labor ,capital, entrepreneurship)

Click the flow that represents the money flow in the factor or resource market Goods and Services Payments for Goods and Services (Product Market) Business Firms Consumer Households (Factor or Resource Market) Payments (RWIP) for Factors of Production (Factors of Production (land, labor ,capital, entrepreneurship)

Click the flow that represents the real flow in the product market Goods and Services Payments for Goods and Services (Product Market) Business Firms Consumer Households (Factor or Resource Market) Payments (RWIP) for Factors of Production (Factors of Production (land, labor ,capital, entrepreneurship)

Click the flow that represents the real flow in the factor or resource market Goods and Services Payments for Goods and Services (Product Market) Business Firms Consumer Households (Factor or Resource Market) Payments (RWIP) for Factors of Production (Factors of Production (land, labor ,capital, entrepreneurship)

The product and resource markets are places where exchanges take place between buyers (demanders) and sellers (suppliers). Depending on the market, business firms and consumer households perform each role: buyer and seller.

Click the sector in the product market that represents the demand-side (buyer) of the product market: Goods and Services Payments for Goods and Services (Product Market) Business Firms Consumer Households (Factor or Resource Market) Payments (RWIP) for Factors of Production (Factors of Production (land, labor ,capital, entrepreneurship)

Correct! In the product market: Consumer households (demanders) make payments (money flow) to purchase goods and services from Business firms

Click the sector in the product market that represents the supply-side (seller) of the product market: Goods and Services Payments for Goods and Services (Product Market) Business Firms Consumer Households (Factor or Resource Market) Payments (RWIP) for Factors of Production (Factors of Production (land, labor ,capital, entrepreneurship)

Correct! In the product market: Business firms sell goods and services (real flow of products) in exchange for payments for goods and services (money flow) from consumer households (demanders).

Click the sector in the factor or resource market that represents the demand-side (buyer) of the market: Goods and Services Payments for Goods and Services (Product Market) Business Firms Consumer Households (Factor or Resource Market) Payments (RWIP) for Factors of Production (Factors of Production (land, labor ,capital, entrepreneurship)

Correct! In the factor or resource market: Business firms (demanders) make payments (money flow) to purchase factors of production from Consumer households

Click the sector in the factor or resource market that represents the supply-side (seller) of the market: Goods and Services Payments for Goods and Services (Product Market) Business Firms Consumer Households (Factor or Resource Market) Payments (RWIP) for Factors of Production (Factors of Production (land, labor ,capital, entrepreneurship)

Correct! In the factor or resource market: Consumer households as individual owners of resources in a capitalist system (private ownership of property) sell their factors of production (real flow) in exchange for income (money flow) from business firms (demanders).

Click the source (sector and market) of the income received by consumer households. Goods and Services Payments for Goods and Services (Product Market) Business Firms Consumer Households (Factor or Resource Market) Payments (RWIP) for Factors of Production (Factors of Production (land, labor ,capital, entrepreneurship)

Click the money flow that represents the components of the income received by consumer households. Goods and Services Payments for Goods and Services (Product Market) Business Firms Consumer Households (Factor or Resource Market) $ (Rent, Wages, Interest, Profit) for Factors of Production (Factors of Production (land, labor ,capital, entrepreneurship)

Correct! In the factor (resource) market: Consumer households receive rent for land, wages for labor, interest for capital, and profit for entrepreneurship from business firms. These payments are the INCOME earned by individuals in exchange for their input of resources (land, labor, capital, entrepreneurship). The SUM of all of these payments (rent, wages, interest, and profit) to individuals make up the NATIONAL INCOME of the entire economy.

Click the flow that represents the National Income of the economy. Goods and Services Payments for Goods and Services (Product Market) Business Firms Consumer Households (Factor or Resource Market) Payments (RWIP) for Factors of Production (Factors of Production (land, labor ,capital, entrepreneurship)

GDP (Gross Domestic Product): Is one of the main measures of economic activity in the U.S. economy GDP is defined as the total VALUE of all final goods and services produced within the boundaries of a nation in a year.

Click the flow that represents the GDP (Gross Domestic Product) in the economy Goods and Services Payments for Goods and Services (Product Market) Business Firms Consumer Households (Factor or Resource Market) Payments (RWIP) for Factors of Production (Factors of Production (land, labor ,capital, entrepreneurship)

Analysis of the Model

Click the flow that represents the costs of production for business firms. Goods and Services Payments for Goods and Services (Product Market) Business Firms Consumer Households (Factor or Resource Market) Payments (RWIP) for Factors of Production (Factors of Production (land, labor ,capital, entrepreneurship)

Click the flow that represents the expenditures of income by consumer households: Goods and Services Payments for Goods and Services (Product Market) Business Firms Consumer Households (Factor or Resource Market) Payments (RWIP) for Factors of Production (Factors of Production (land, labor ,capital, entrepreneurship)

The Circular Flow Model Goods and Services Payments for Goods and Services (Product Market) Business Firms Consumer Households (Factor or Resource Market) Payments (RWIP) for Factors of Production (Factors of Production (land, labor ,capital, entrepreneurship)

Discuss and determine an answer to the following before going on to the next slide. Business firms pay their costs of production through the receipt of payments for __?__ sold in the __?__ market. Go back to view model

Business firms pay their costs of production through the receipt of payments for __?__ sold in the __?__ market. Factors of production; resource market Factors of production; product market Goods and services; resource market Goods and service; product market

The Circular Flow Model Goods and Services Payments for Goods and Services (Product Market) Business Firms Consumer Households (Factor or Resource Market) Payments (RWIP) for Factors of Production (Factors of Production (land, labor ,capital, entrepreneurship)

Discuss and determine an answer to the following before going on to the next slide. The real flow of __?__ in the __?__ market are used to produce the __?__ sold in the __?__ market Go back to view model

The real flow of _. _ in the _. _ market are used to produce the _ The real flow of _?_ in the _?_ market are used to produce the _?_ sold in the _?_ market Payments; resource; resources; product. Goods and services; product; resources; factor. Income; product; goods and services; factor. Resources; factor; goods and services; product.

The Circular Flow Model Payments (RWIP) for Factors of Production Payments for Goods and Services Goods and Services (Product Market) (Factor or Resource Market) (Factors of Production (land, labor ,capital, entrepreneurship) Business Firms Consumer Households

Discuss and determine an answer to the following before going on to the next slide. Consumer households sell their __?__ in the __?__ market to receive __?__ used to purchase __?__ in the __?__ market. Go back to view model

Consumer households sell their _. _ in the _. _ market to receive _ Consumer households sell their _?_ in the _?_ market to receive _?_ used to purchase _?_ in the _?_ market. Goods and services; product; income; resources; factor. Resources; factor; income; goods and services; product. Income; factor; goods and services; resources; factor. Factors of production; product; income; goods and services; resource. -

Click the market in the CFM that determines what will be produced: Goods and Services Payments for Goods and Services (Product Market) Business Firms Consumer Households (Factor or Resource Market) Payments (RWIP) for Factors of Production (Factors of Production (land, labor ,capital, entrepreneurship)

Click the market in the CFM that determines how goods will be produced: Goods and Services Payments for Goods and Services (Product Market) Business Firms Consumer Households (Factor or Resource Market) Payments (RWIP) for Factors of Production (Factors of Production (land, labor ,capital, entrepreneurship)

Click the market in the CFM that determines for whom goods are produced: Goods and Services Payments for Goods and Services (Product Market) Business Firms Consumer Households (Factor or Resource Market) Payments (RWIP) for Factors of Production (Factors of Production (land, labor ,capital, entrepreneurship)

In a free market economy, the consumers who get the goods and services are those who are willing and able to purchase the goods. Income, earned in the factor market, determines who has the ability to purchase the output of the economy.

Check for understanding: identify sectors, markets, and flows represented by the letters on the CFM below. Do not click button until all are identified. (Factors of Production (land, labor ,capital, entrepreneurship) C. (D.) A. B. (E.) F. G.

Check for understanding: Check Answers. (Factors of Production (land, labor ,capital, entrepreneurship) $ for factors of production (rent, wages, interest, profit) (Factor/Resource market) Consumer Households Business Firms (Product market) $ for goods and services Goods and Services

The end.