1. Circular Flow Gemma Kotula Christopher Newport University
Center for Economic Education

2. Lets look at some definitions
Market – any place where buyers and sellers come together Revenue – money earned from the sale of goods & services Interest – additional money owed when taking out a loan Wages – money paid for labor (workers) Income – money earned by performing labor (working) Rent – money paid for the use of land or property

3. Businesses
Households
Circular Flow
Decision Makers

4. 2 Markets Circular Flow Product Market Businesses Resource Market
Market for
Goods & Services
Businesses
Households
Circular Flow
2 Decision Makers
2 Markets
Resource Market
(Factor Market)
Market for
Factors of Production

5. Circular Flow Product Market Businesses Resource Market Households
Market for
Goods & Services
Spending $
Goods and Services Bought by Consumers
Businesses
Households
Circular Flow
Flow of Dollars
Flow of Goods and Services
Resource Market
(Factor Market)
Market for
Factors of Production

6. Circular Flow Product Market Businesses Resource Market Households $ $
Market for
Goods & Services
Revenue
Spending $ $
Goods and Services Bought by Consumers
Goods and Services Sold By Firms
Businesses
Circular Flow
Households
Flow of Dollars
Flow of Goods and Services
Resource Market
(Factor Market)
Market for
Factors of Production

7. Circular Flow Product Market Businesses Resource Market Households $ $
Market for
Goods & Services
Revenue
Spending $ $
Goods and Services Sold By Firms
Goods and Services Bought by Consumers
Businesses
Circular Flow
Households
Decision Makers
Markets
Flow of Dollars
Land, Labor, Capital, Entrepreneurship and Technology
Flow of Goods and Services $
Flow of Factors of Production
Resource Market
(Factor Market)
Market for
Factors of Production
Wages, Rents, and Interest

8. Circular Flow Product Market Businesses Resource Market Households $ $
Market for
Goods & Services
Revenue
Spending $ $
Goods and Services Sold By Firms
Goods and Services Bought by Consumers
Businesses
Households
Circular Flow
Decision Makers
Markets
Flow of Dollars
Land, Labor, Capital, Entrepreneurship and Technology
Land, Labor, Capital, Entrepreneurship and Technology
Flow of Goods and Services $
Flow of Factors of Production $
Resource Market
(Factor Market)
Market for
Factors of Production
Income
Wages, Rents, and Interest

9. Circular Flow of Dollars
Even though we have worked quadrant to quadrant we now have a complete…
Circular Flow of Dollars

10. Flow of Dollars Circular Flow Product Market Businesses
Revenue
Spending
Product Market
Market for
Goods & Services $ $
Decision Makers
Markets
Circular Flow
Businesses
Households
Flow of Dollars $ $
Resource Market
(Factor Market)
Market for
Factors of Production
Wages, Rents, and Interest
Income

11. and the Factors of Production
Even though we have worked quadrant to quadrant we now have a complete…
Circular Flow
of Goods, Services,
and the Factors of Production

12. Circular Flow Product Market Businesses Resource Market Households
Market for
Goods & Services
Goods and Services Bought By Consumers
Goods and Services Sold By Firms
Circular Flow
Businesses
Decision Makers
Markets
Households
Flow of Goods and Services & Flow of Factors of Production
Land, Labor, Capital, Entrepreneurship & Technology
Land, Labor, Capital, Entrepreneurship & Technology
Resource Market
(Factor Market)
Market for
Factors of Production

13. Putting all flows together shows us that they are indeed circular.
Therefore the dollars that flow around counterclockwise (in this example) are equal to…
The goods, services, and factors of production that flow around clockwise (in this example).

14. Flow of Goods and Services & Flow of Factors of Production
Revenue
Spending
Product Market
Market for
Goods & Services $ $
Goods and Services Bought By Consumers
Goods and Services Sold By Firms
Circular Flow
Decision Makers
Markets
Flow of Dollars
Flow of Goods and Services & Flow of Factors of Production
Businesses
Households
Land, Labor, Capital, Entrepreneurship & Technology
Land, Labor, Capital, Entrepreneurship & Technology $ $
Resource Market
(Factor Market)
Market for
Factors of Production
Wages, Rents, and Interest
Income

15. Does the Circular Flow Leak?
Classical economists were guided by Say’s Law.
In a simple economy Say’s Law states that by producing goods and services, firms create a total demand for goods and services equal to what they have produced.
Or more simply, supply creates its own demand. So yes there may be leaks!

16. But it also gets “pumped up”!
Households don’t spend all of their income. Rather, some of their income goes to savings (leakage) or to pay taxes (leakage).
Households are not the only spenders in the economy. Rather, firms also spend money on capital goods (injection) and the government also spends money on final goods and services (injection).
In addition to markets for goods and markets for resources, there is also a loanable funds market where household saving is made available to firms and the government.

17. Total spending in the circular flow will equal total output in the circular flow if and only if leakages in the economy are equal to total injections.

18. Or… what goes around comes around!
Total Spending =
Total Output
Or… what goes around comes around!

19. Government has a role in the economy…
However, the government’s role in the economy is dependent on the taxes it charges (and firms and households pay).
And that role includes providing goods and services to those same firms and housholds!

20. Product Market Businesses Resource Market Households Market for
Revenue
Spending
Product Market
Market for
Goods & Services $ $
Government
Provides goods and services to Households
and receives taxes in return
Businesses
Households
Government
Provides goods and services to Firms
and receives taxes in return $ $
Resource Market
(Factor Market)
Market for
Factors of Production
Wages, Rents, and Interest
Income