1. Circular Flow & Business Cycle
AP Macroeconomics
Circular Flow & Business Cycle
How the U.S. Economy works

2. Economic Models Economists use models to simplify our world
Allows for economic analysis to occur
The 2 most basic economic models are:
Circular Flow Diagram
Production Possibilities Frontier (PPF)

3. 2 Sides of a Market Economy
Consumers decide what to BUY!
Producers decide what to SELL (MAKE)
HOUSEHOLDS
FIRMS

4. Product & Factor Markets
Product Market:
where any good or service is sold to
consumers
Factor Market:
where factors of production are exchanged
4 Factors of Production:
Land- all basic natural resources
Labor- human work
Capital- (physical, human) goods used in production of goods
Entrepreneurship- managerial ability & risk taking

5. The circular flow describes how goods, services and money flow through a free market economy
PRODUCT
MARKET
Revenue
Spending
Goods
and services
sold
Goods and
services
bought
HOUSEHOLDS
FIRMS
Rent is paid for Land
Wages is paid for Labor
Profit is paid to Entrepreneurs
FACTOR
MARKET
Factors of
production
Labor, land,
capital & entrepreneurship
Wages, rent,
and profit
Income
= Flow of inputs
and outputs
= Flow of dollars

6. Economists often Disagree
Are tax cuts good or bad?
Do Large Deficits raise interest rates?
Is our Trade Deficit Dangerous?
The answer to most economic questions is:
IT DEPENDS!

7. Business Cycle
Historically every economy moves through cycles

8. Alphabet Recoveries
Video #85

9. Current Economics Reading
Where is the U.S. today in the Business Cycle?

10. Business Cycle ? 2000 2006 1990’s Technology Boom Housing Bubble
2001
2006
Housing Bubble
2012
Great Recession ?

11. Business Cycle
Graphing Economic History

13. Long Term Growth Rate