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Published byArron Wilkinson Modified over 9 years ago
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Households and Firms Participants = households & firms Households: a psn or group of ppl living in a single residence Own FOP Firm (business): organization that uses resources to produce a product or service, which it then sells transform inputs (factors of production) into outputs (goods/services)
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Circular Flow Model of a Market Economy Visual representation of exchanges that take place in a free market economy Shows how households and firms exchange money, resources, and products
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Factor Markets (Resource Markets) Lower half of circular model Firms purchase factors of production from households (factor market) Purchase or rent land Hire workers, pay wages/salaries Borrow $ from households to pay capital
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Product Market Top half of circular flow model Households buy goods and services that firms produce (product market)
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The Self-Regulating Nature of the Market Place The Wealth of Nations Adam Smith: both the buyer and seller consider only their self-interest. Self-interest = motivating force in free market Positive incentive of lower prices = buying of more goods
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The Invisible Hand Self-interest and competition regulate the market economy Laissez-Faire government Market is self-regulating and supply & demand = the invisible hand Coined by Adam Smith
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Incentives
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Circular Flow Model of a Mixed Economy
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