Circular Flow Chart of a Pure Market Economy ©2012, TESCCC
Objectives Analyze a circular flow model of a pure market economy. Explain how you act as both a buyer and a seller. Explain the economic interdependence of this model. ©2012, TESCCC
2 Sector Circular Flow Model Our two sectors are : 1. Households 2. Business Firms ©2012, TESCCC
Product Market Resource Market Products = Goods & Services $$$ Consumer Expenditures $$$$ Households Businesses $$$$ Nat’l Income = Rent, Wages, Interest, Profit Resources = Land, Labor, Capital, Entrepreneurship Resource Market ©2012, TESCCC
Two Sectors Households Businesses
Households Households are the owners of the resources, land, labor and capital. Households become the entrepreneurs. They sell these resources to the business firms. ©2012, TESCCC
Resource Market Households Businesses Resources = Land, Labor, Capital, Entrepreneurship Resource Market ©2012, TESCCC
Business Firms Business firms make money payments back to households for the resources. This makes up what we call national income. ©2012, TESCCC
Resource Market Households Businesses $$ Nat’l Income = Rent, Wages, Interest, Profit $$ Resources = Land, Labor, Capital, Entrepreneurship Resource Market
Resource Market This exchange of resources for income payments takes place in what we call the resource market. Households are the sellers and business firms are the buyers. ©2012, TESCCC
Business firms Business firms take the resources and turn them into products. A product can be a good or a service. They then sell the products to the households. ©2012, TESCCC
Product Market Products =Goods & Services Households Businesses ©2012, TESCCC
Households Households use the income they earned from selling resources to purchase these products. This is called consumer expenditures. ©2012, TESCCC
Product Market Products =Goods & Services $$$ Consumer Expenditures $$ Households Businesses ©2012, TESCCC
Product Market This exchange of products for consumer expenditures takes place in the product market. The business firm is the seller and households are the buyers. ©2012, TESCCC
Product Market Resource Market Products=Goods & Services $$ Consumer Expenditures $$ Households Businesses Nat’l Income = Rent, Wages, Interest, Profit Resources = Land, Labor, Capital, Entrepreneurship Resource Market ©2012, TESCCC
Real Flow This is the flow of resources from household to business firms and the flow of finished products from business firms to households. ©2012, TESCCC
Product Market Resource Market Products =Goods & Services Households Businesses Resources = Land, Labor, Capital, Entrepreneurship Resource Market ©2012, TESCCC
Money Flow This is the money from business firms to households as income. From households to business firms it is consumer expenditures, consumers buying products. ©2012, TESCCC
Product Market Resource Market $$ Consumer Expenditures $$ Households Businesses Nat’l Income = Rent, Wages, Interest, Profit $$ Resource Market ©2012, TESCCC
Product Market Resource Market Products =Goods & Services $$ Consumer Expenditures $$ Households Businesses $$ $$$ Nat’l Income = Rent, Wages, Interest, Profit Resources = Land, Labor, Capital, Entrepreneurship Resource Market ©2012, TESCCC
(rent, wages, interest, profit) Resource Market Buyers: Business Firms Sellers: Households Exchange: Factors of production (land, labor, capital and entrepreneurship) for National income (rent, wages, interest, profit) ©2012, TESCCC
Consumer Expenditures Product Market Buyers: Households Sellers: Business Firms Exchange: Goods & services for Consumer Expenditures part of GDP ©2012, TESCCC
How do government actions affect the CFM and how is the CFM affected by the rest of the world? ©2012, TESCCC http://tutor2u.net/economics/content/topics/macroeconomy/circular_flow.htm