Unit 5, Lesson 12

The Circular Flow Model

AOFBusiness Economics

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The circular flow model

Households and individuals sell labor in the factor markets and buy products in the product markets.

Households and individuals

What are some resources you sell?

Firms, or businesses, sell finished goods and services in the product markets and buy land, labor, and capital in the factor markets.

Do you sell anything to a business? What do you sell?

Firms

Government

The government collects taxes from both firms and individuals/ households; in return it provides public services.

Do you think government belongs in the center of the circular flow? Why or why not?

Product markets

Product markets are where firms, individuals and households, and government buy and sell goods and services.

Name some products and services that are traded in the product markets.

Factor markets

The factor markets are where firms, individuals and households, and government buy and sell the factors of production—land, labor, and capital. What factors

may be traded in the production of buildings?

The circular flow model in action

The importance of the circular flow model

The circular flow model shows how the individual actors in the US economy interact and depend upon each other to create a healthy economy.