0. Circular Flow Chart of a Pure Market Economy
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1. Objectives Analyze a circular flow model of a pure market economy.
Explain how you act as both a buyer and a seller.
Explain the economic interdependence of this model.
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2. 2 Sector Circular Flow Model
Our two sectors are :
1. Households
2. Business Firms
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3. Product Market Resource Market Products = Goods & Services
$$$ Consumer Expenditures $$$$
Households
Businesses
$$$$
Nat’l Income = Rent, Wages, Interest, Profit
Resources = Land, Labor, Capital, Entrepreneurship
Resource Market
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4. Two Sectors
Households
Businesses

5. Households
Households are the owners of the resources, land, labor and capital. Households become the entrepreneurs. They sell these resources to the business firms.
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6. Resource Market Households Businesses
Resources = Land, Labor, Capital, Entrepreneurship
Resource Market
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7. Business Firms
Business firms make money payments back to households for the resources. This makes up what we call national income.
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8. Resource Market Households Businesses
$$ Nat’l Income = Rent, Wages, Interest, Profit $$
Resources = Land, Labor, Capital, Entrepreneurship
Resource Market

9. Resource Market
This exchange of resources for income payments takes place in what we call the resource market. Households are the sellers and business firms are the buyers.
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10. Business firms
Business firms take the resources and turn them into products. A product can be a good or a service. They then sell the products to the households.
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11. Product Market Products =Goods & Services Households Businesses
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12. Households
Households use the income they earned from selling resources to purchase these products. This is called consumer expenditures.
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13. Product Market Products =Goods & Services $$$ Consumer Expenditures $$
Households
Businesses
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14. Product Market
This exchange of products for consumer expenditures takes place in the product market. The business firm is the seller and households are the buyers.
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15. Product Market Resource Market Products=Goods & Services
$$ Consumer Expenditures $$
Households
Businesses
Nat’l Income = Rent, Wages, Interest, Profit
Resources = Land, Labor, Capital, Entrepreneurship
Resource Market
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16. Real Flow
This is the flow of resources from household to business firms and the flow of finished products from business firms to households.
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17. Product Market Resource Market Products =Goods & Services Households
Businesses
Resources = Land, Labor, Capital, Entrepreneurship
Resource Market
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18. Money Flow
This is the money from business firms to households as income. From households to business firms it is consumer expenditures, consumers buying products.
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19. Product Market Resource Market $$ Consumer Expenditures $$ Households
Businesses
Nat’l Income = Rent, Wages, Interest, Profit $$
Resource Market
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20. Product Market Resource Market Products =Goods & Services
$$ Consumer Expenditures $$
Households
Businesses
$$ $$$
Nat’l Income = Rent, Wages, Interest, Profit
Resources = Land, Labor, Capital, Entrepreneurship
Resource Market
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21. (rent, wages, interest, profit)
Resource Market
Buyers: Business Firms
Sellers: Households
Exchange: Factors of production (land, labor, capital and entrepreneurship)
for
National income
(rent, wages, interest, profit)
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22. Consumer Expenditures
Product Market
Buyers: Households
Sellers: Business Firms
Exchange: Goods & services
for
Consumer Expenditures
part of GDP
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23. How do government actions affect the CFM and how is the CFM affected by the rest of the world?
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