Circular Flow in a Market Economy Where does your money go?

Map your dollar Imagine you stop at your favorite fast food restaurant after school today and buy one item off the dollar menu. Where are all the places your dollar goes after it leaves your pocket?

The Exchange of Products and Resources Market: a place where buyers and sellers meet to engage in mutually beneficial exchanges with one another. There are two types of markets in a Market Economy: The Product Market and the Resource Market. There are two main players in a Market Economy: The Households(Consumers) and the Firms (Businesses)

Households Have 3 scarce resources: Land: Natural Resources Labor: Human Resources = workers Capital: Anything used to make another product. Capital from households also includes money.

Firms Established by entrepreneurs: people from households who start their own businesses. Need resources from the households to make goods and services to sell back to the households.

Resource Markets Money Resources Households sell, Firms buy: factors of production (land, labor and capital). Money for land= Rent Money for labor= Income Money for capital= Interest Money is the incentive for households to participate in the resource market. It allows them to receive goods and services in the product market. Money Resources

Product Markets Money Goods/Services Firms sell, Households buy: goods and services Firms produce goods and services to sell with factors of production purchased from households. Households pay for goods and services with money acquired in Resource market (income) Goods/Services Money

The Circular Flow Model

Goals Firms Households Maximize profits (total revenue is greater than total cost) Sell goods and services for more than they spent on resources Maximize utility (happiness) Happiness is achieved through the consumption of goods and services

The Government in the Circular Flow Model Since a pure free market has never existed the government also falls into the circular flow model. The government purchases goods and services from firms, and factors of production from households The government collects money from both households and firms in the form of taxes The government also provides goods and services to firms and households: roads, social programs, subsidies (financial aid to businesses or individuals) etc. Taxes Purchases Expenditures Factors

Mixed Economy Circular Flow Model

How do YOU Fit Into the Circular Flow List all expenditures and activities you did this weekend that required spending money (could be spent by you or someone else) Create a circular flow chart showing how your activities fit into the flow.