Post on 24-Dec-2015
Analysis of:
The Simple
Circular Flow Model
Objective:
Analyze the simple circular flow model to detect relationships among its:
• sectors• markets• flows
Payments (RWIP) for Factors of Production
Payments for Goods and Services
Goods and Services
(Product Market)
(Factor or Resource Market)
(Factors of Production (land, labor ,capital, entrepreneurship)
The Circular Flow Model
Business FirmsConsumer
Households
The assumptions of the Circular Flow Model (CFM) are the
characteristics of capitalism.
• Economic freedom
• Private property
• Economic incentives (profit motive)
• Competitive markets
• A price system based on supply and demand
• Involuntary exchanges
• Limited government
All of the following are assumptions of the circular flow model,
EXCEPT:
A capitalist (free enterprise) system is based on voluntary (free) exchanges
rather than involuntary (forced) exchanges. Voluntary exchanges are
necessary to ensure a competitive marketplace. Consumers are not forced to purchase from a single seller -- they are free to choose from among many sellers of the same product or service.
Identification of the components of the Circular Flow Model
Sectors
Markets
Flows
Payments (RWIP) for Factors of Production
Payments for Goods and Services
Goods and Services
(Product Market)
(Factor or Resource Market)
(Factors of Production (land, labor ,capital, entrepreneurship)
Click separately on the two major sectors of the CFM.
Business FirmsConsumer
Households
In a simple circular flow model (CFM) exchanges take place
between the two major sectors:
• Business firms (want to sell goods and services and purchase factors of production)
• Consumer households (want to purchase goods and services and sell their factors of production)
Exchanges take place between business firms and consumer households in the MARKETS of the economy. Analyze the model below to identify the two markets of
the CFM:
Payments (RWIP) for Factors of Production
Payments for Goods and Services
Goods and Services
(Product Market)
(Factor or Resource Market)
(Factors of Production (land, labor ,capital, entrepreneurship)
Business FirmsConsumer
Households
Exchanges that occur between sectors in the CFM are called “flows of economic activity.”
• In each market there is a MONEY FLOW (payment)
• And a REAL FLOW (good, service or factor of production for which a payment is made)
Payments (RWIP) for Factors of Production
Payments for Goods and Services
Goods and Services
(Product Market)
(Factor or Resource Market)
(Factors of Production (land, labor ,capital, entrepreneurship)
Click the flow that represents the money flow in the product market
Business FirmsConsumer
Households
Payments (RWIP) for Factors of Production
Payments for Goods and Services
Goods and Services
(Product Market)
(Factor or Resource Market)
(Factors of Production (land, labor ,capital, entrepreneurship)
Click the flow that represents the money flow in the factor or resource market
Business FirmsConsumer
Households
Payments (RWIP) for Factors of Production
Payments for Goods and Services
Goods and Services
(Product Market)
(Factor or Resource Market)
(Factors of Production (land, labor ,capital, entrepreneurship)
Click the flow that represents the real flow in the product market
Business FirmsConsumer
Households
Payments (RWIP) for Factors of Production
Payments for Goods and Services
Goods and Services
(Product Market)
(Factor or Resource Market)
(Factors of Production (land, labor ,capital, entrepreneurship)
Click the flow that represents the real flow in the factor or resource market
Business FirmsConsumer
Households
The product and resource markets are places where exchanges take
place between buyers (demanders) and sellers (suppliers).
Depending on the market, business firms and consumer households perform each role: buyer and
seller.
Click the sector in the product market that represents the demand-side (buyer) of the
product market:
Payments (RWIP) for Factors of Production
Payments for Goods and Services
Goods and Services
(Product Market)
(Factor or Resource Market)
(Factors of Production (land, labor ,capital, entrepreneurship)
Business FirmsConsumer
Households
Correct! In the product market:
• Consumer households (demanders) make payments (money flow) to
purchase goods and services
from
• Business firms
Click the sector in the product market that represents the supply-side (seller) of the
product market:
Payments (RWIP) for Factors of Production
Payments for Goods and Services
Goods and Services
(Product Market)
(Factor or Resource Market)
(Factors of Production (land, labor ,capital, entrepreneurship)
Business FirmsConsumer
Households
Correct! In the product market:
• Business firms sell goods and services (real flow of products)
in exchange for
• payments for goods and services (money flow) from consumer households
(demanders).
Click the sector in the factor or resource market that represents the demand-side
(buyer) of the market:
Payments (RWIP) for Factors of Production
Payments for Goods and Services
Goods and Services
(Product Market)
(Factor or Resource Market)
(Factors of Production (land, labor ,capital, entrepreneurship)
Business FirmsConsumer
Households
Correct! In the factor or resource market:
• Business firms (demanders) make payments (money flow) to purchase
factors of production
from
• Consumer households
Click the sector in the factor or resource market that represents the supply-side (seller)
of the market:
Payments (RWIP) for Factors of Production
Payments for Goods and Services
Goods and Services
(Product Market)
(Factor or Resource Market)
(Factors of Production (land, labor ,capital, entrepreneurship)
Business FirmsConsumer
Households
Correct! In the factor or resource market:
• Consumer households as individual owners of resources in a capitalist system (private
ownership of property) sell their factors of production (real flow)
in exchange for
• income (money flow) from business firms (demanders).
Payments (RWIP) for Factors of Production
Payments for Goods and Services
Goods and Services
(Product Market)
(Factor or Resource Market)
(Factors of Production (land, labor ,capital, entrepreneurship)
Click the source (sector and market) of the income received by consumer households.
Business FirmsConsumer
Households
$ (Rent, Wages, Interest, Profit) for Factors of Production
Payments for Goods and Services
Goods and Services
(Product Market)
(Factor or Resource Market)
(Factors of Production (land, labor ,capital, entrepreneurship)
Click the money flow that represents the components of the income received by consumer
households.
Business FirmsConsumer
Households
Correct! In the factor (resource) market:
• Consumer households receive rent for land, wages for labor, interest for capital, and profit
for entrepreneurship from business firms.• These payments are the INCOME earned by
individuals in exchange for their input of resources (land, labor, capital, entrepreneurship).
• The SUM of all of these payments (rent, wages, interest, and profit) to individuals make up the NATIONAL INCOME of the entire economy.
Payments (RWIP) for Factors of Production
Payments for Goods and Services
Goods and Services
(Product Market)
(Factor or Resource Market)
(Factors of Production (land, labor ,capital, entrepreneurship)
Click the flow that represents the National Income of the economy.
Business FirmsConsumer
Households
GDP (Gross Domestic Product):
• Is one of the main measures of economic activity in the U.S. economy
• GDP is defined as the total VALUE of all final goods and services produced within the boundaries of a nation in a year.
Payments (RWIP) for Factors of Production
Payments for Goods and Services
Goods and Services
(Product Market)
(Factor or Resource Market)
(Factors of Production (land, labor ,capital, entrepreneurship)
Click the flow that represents the GDP (Gross Domestic Product) in the economy
Business FirmsConsumer
Households
Analysis of the Model
Payments (RWIP) for Factors of Production
Payments for Goods and Services
Goods and Services
(Product Market)
(Factor or Resource Market)
(Factors of Production (land, labor ,capital, entrepreneurship)
Click the flow that represents the costs of production for business firms.
Business FirmsConsumer
Households
Payments (RWIP) for Factors of Production
Payments for Goods and Services
Goods and Services
(Product Market)
(Factor or Resource Market)
(Factors of Production (land, labor ,capital, entrepreneurship)
Click the flow that represents the expenditures of income by consumer households:
Business FirmsConsumer
Households
Payments (RWIP) for Factors of Production
Payments for Goods and Services
Goods and Services
(Product Market)
(Factor or Resource Market)
(Factors of Production (land, labor ,capital, entrepreneurship)
The Circular Flow Model
Business FirmsConsumer
Households
Discuss and determine an answer to the following before going on
to the next slide.
Business firms pay their costs of production through the receipt of
payments for __?__ sold in the __?__ market.
Go back to view model
Business firms pay their costs of production through the receipt of payments for __?__
sold in the __?__ market.
• Factors of production; resource market
• Factors of production; product market
• Goods and services; resource market
• Goods and service; product market
Payments (RWIP) for Factors of Production
Payments for Goods and Services
Goods and Services
(Product Market)
(Factor or Resource Market)
(Factors of Production (land, labor ,capital, entrepreneurship)
The Circular Flow Model
Business FirmsConsumer
Households
Discuss and determine an answer to the following before going on
to the next slide.
The real flow of __?__ in the __?__ market are used to produce the __?__ sold in the __?__ market
Go back to view model
The real flow of _?_ in the _?_ market are used to produce the _?_ sold in the _?_ market
• Payments; resource; resources; product.
• Goods and services; product; resources; factor.
• Income; product; goods and services; factor.
• Resources; factor; goods and services; product.
The Circular Flow Model
Payments (RWIP) for Factors of Production
Payments for Goods and Services
Goods and Services
(Product Market)
(Factor or Resource Market)
(Factors of Production (land, labor ,capital, entrepreneurship)
Business FirmsConsumer
Households
Discuss and determine an answer to the following before going on
to the next slide.
Consumer households sell their __?__ in the __?__ market to
receive __?__ used to purchase __?__ in the __?__ market.
Go back to view model
• Goods and services; product; income; resources; factor.
• Resources; factor; income; goods and services; product.
• Income; factor; goods and services; resources; factor.
• Factors of production; product; income; goods and services; resource.
Consumer households sell their _?_ in the _?_ market to receive _?_ used to purchase _?_
in the _?_ market.
-
Click the market in the CFM that determines what will be produced:
Payments (RWIP) for Factors of Production
Payments for Goods and Services
Goods and Services
(Product Market)
(Factor or Resource Market)
(Factors of Production (land, labor ,capital, entrepreneurship)
Business FirmsConsumer
Households
Click the market in the CFM that determines how goods will be produced:
Payments (RWIP) for Factors of Production
Payments for Goods and Services
Goods and Services
(Product Market)
(Factor or Resource Market)
(Factors of Production (land, labor ,capital, entrepreneurship)
Business FirmsConsumer
Households
Click the market in the CFM that determines for whom goods are produced:
Payments (RWIP) for Factors of Production
Payments for Goods and Services
Goods and Services
(Product Market)
(Factor or Resource Market)
(Factors of Production (land, labor ,capital, entrepreneurship)
Business FirmsConsumer
Households
In a free market economy, the consumers who get the goods and
services are those who are willing and able to purchase the goods. Income, earned in the factor market, determines who has the ability to purchase the
output of the economy.
Check for understanding: identify sectors, markets, and flows represented by the letters on the CFM below. Do not click button until
all are identified.
(D.)
(E.)
(Factors of Production (land, labor ,capital, entrepreneurship)
A. B.
C.
F.
G.
Check for understanding: Check Answers.
(Factor/Resource market)
(Product market)
(Factors of Production (land, labor ,capital, entrepreneurship)
Consumer Households
Business Firms
$ for factors of production (rent, wages, interest, profit)
$ for goods and services
Goods and Services
The end.