1. A tool that economists use to understand how market economies operate.
Circular Flow Model
A tool that economists use to understand how market economies operate.

2. Circular Flow Chart of “Economic Activity”
Only applies to a
MARKET ECONOMY

3. Two sectors (usually on horizontal plane—East/West)
households and businesses
Two markets (usually on vertical plane—North/South)
product and factor
Two Flows
- money ($$)
- Resources/Products or goods/services
Factors of Production are owned by households

4. Households
Businesses

5. Households
Businesses
Factor Market
(or Resource Market)

6. (SELL) F.O.P. = Land, Labor, Capital, Entrepreneurship
Households
Businesses
(SELL) F.O.P. = Land, Labor, Capital, Entrepreneurship
Factor Market
(or Resource Market)

7. (SELL) F.O.P = Labor, Land, Capital, Entrepreneurship
Households
Businesses
(PAY) = Wages (labor), Rent (land), Interest(capital), Profit (entrepreneur)
(SELL) F.O.P = Labor, Land, Capital, Entrepreneurship
Factor Market
(or Resource Market)

8. F.O.P = Labor, Land, Capital, Entrepreneurship
Product Market
Households
Businesses
National Income = Wages, Rent, Interest, Profit
F.O.P = Labor, Land, Capital, Entrepreneurship
Factor Market
(or Resource Market)

9. National Income
The total income earned in a nation from the production of goods and services.

10. F.O.P = Labor, Land, Capital, Entrepreneurship
Product Market
(SELL) Goods & Services
Households
Businesses
National Income = Wages, Rent, Interest, Profit
F.O.P = Labor, Land, Capital, Entrepreneurship
Factor Market
(or Resource Market)

11. F.O.P = Labor, Land, Capital, Entrepreneurship
Product Market
(PAY) – Consumer Spending
Households
Businesses
National Income = Wages, Rent, Interest, Profit
F.O.P = Labor, Land, Capital, Entrepreneurship
Factor Market
(or Resource Market)

12. F.O.P = Labor, Land, Capital, Entrepreneurship
Product Market
SELL- Goods & Services
GDP -Consumer Spending
Households
Businesses
National Income = Wages(Labor), Rent (Land), Interest, (Entrepreneur) Profit
F.O.P = Labor, Land, Capital, Entrepreneurship
Factor Market
(or Resource Market)

13. GDP - Gross Domestic Product
The dollar value of all goods and services produced within a nation in a year.

14. F.O.P = Labor, Land, Capital, Entrepreneurship
Flow of Resources/Products
Product Market
Product Market
Goods & Services
Households
Businesses
F.O.P = Labor, Land, Capital, Entrepreneurship
Factor Market
(or Resource Market)

15. Money Flow Product Market Factor Market (or Resource Market)
GDP = Consumer Spending
Households
Businesses
National Income = Wages, Rent, Interest, Profit
Factor Market
(or Resource Market)

16. F.O.P = Labor, Land, Capital, Entrepreneurship
Product Market
Goods & Services
GDP = Consumer Spending
Households
Businesses
National Income = Wages, Rent, Interest, Profit
F.O.P = Labor, Land, Capital, Entrepreneurship
Factor Market
(or Resource Market)

17. 1- You buy a new pair of jeans. Which market is this transaction?
2- You get a job at Wal-Mart and get paid wages to pay your bills. Which market is this?
3- Academy is hiring more workers during Christmas break. Which market will this take place?
4- I bought my sister a gift for her birthday. Which market is this?
5- I got fired from my job as a snow cone maker. Which market is this?

18. 1- You need a smartphone to look up how to get to your friends house
1- You need a smartphone to look up how to get to your friends house. What resource is the smartphone?
2- You’re making money from your brilliant new idea. What income will be earned?
3- You need wood and sand to make your product. What resource are these?
4- I work as a carhop at Sonic. What income is earned?

19.
-Crash Course: about 5min.