1. Circular Flow
Lesson 1.4

2. Abstract
This lesson introduces students to the circular flow of goods and services in the national marketplace. Students learn how one part of the cycle affects the entire exchange process. Students explore the roles of both producers and consumers in the marketplace. In doing so, they broaden their understanding of the decision making from cost/benefit analysis and marginal analysis to include the economic concept of comparative advantage.

4. Circular Flow Diagram
This is a way to view the economy. It divides the economy into two sections. Real one is much more complicated.
One section deals with consumption while the other deals with production.

5. Circular Flow Diagram
- Resources are converted into goods and services by businesses.
- This occurs in the productive resources market (Markets for Factors of Production).
- The consumer goods and services then flow back to households in product market (Markets for Goods and Services).
- Money, in turn, flows in the opposite direction.
- Money is sent back to the businesses in return for these consumer goods and services.

6. Circular Flow Diagram
- In both markets, an exchange takes place that allows the circular flow model to work efficiently.

7. Turn & Talk
How do individuals decide what goods and services to buy in the product market?
How do businesses decide what goods or services to produce?
How might businesses decide what resources are needed to produce the goods or service for the product market?

8. Rational Decisions Can be made the following ways:
Use of cost/benefit analysis
Marginal analysis
Comparative Advantage (Will discuss more later)
Determines what you (country) does best RELATIVE to another.
Ex: a high school team has a player (player A) who is a very good catcher. However, he is also a very good third baseman. He cannot play both at the same time. The team has another player (player B) who is also a good catcher, but does not play third base as well as player A. The concept of comparative advantage addresses the opportunity cost of a decision between two choices. The coach applies the concept of comparative advantage by putting player A at third base and player B at catcher. The coach weighed the opportunity cost of player A at catcher/ player B at third base against the situation where player A is at third base/ player B at catcher. By comparing what each one does best relative to each other, the coach is able make a rational decision that will better serve his team – and the whole team is better as a result.

9. Individual works at Subway and buying jeans at Macy’s department store
Individual works at Subway and buying jeans at Macy’s department store. Determine what happens between each location (should have 8 answers)
Student Example

10. Go Around Dollar
Read book to class.

12. What alters the Flow?
Different scenarios can arise that can increase or decrease the production/consumption of goods; which can speed up or slow down the circular flow model.
Groups of 3
Complete 1 scenario that is given to you and act out a skit to demonstrate the scenario and its consequences

13. Homework
Find a current event example (in the newspaper or online) of situations that would increase/decrease the speed of the circular flow model.
Write a short response to the article. Reflect on the circular flow model and how the current event fits the topic.