Analysis of: The Simple Circular Flow Model Objective: Analyze the simple circular flow model to...

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



Goods and Services

(Product Market)



Click separately on the two major sectors of the CFM.


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:



Goods and Services

(Product Market)




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)



Goods and Services

(Product Market)



Click the flow that represents the money flow in the product market


Households



Goods and Services

(Product Market)



Click the flow that represents the money flow in the factor or resource market


Households



Goods and Services

(Product Market)



Click the flow that represents the real flow in the product market


Households



Goods and Services

(Product Market)



Click the flow that represents the real flow in the factor or resource market


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:



Goods and Services

(Product Market)




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:



Goods and Services

(Product Market)




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:



Goods and Services

(Product Market)




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:



Goods and Services

(Product Market)




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).



Goods and Services

(Product Market)



Click the source (sector and market) of the income received by consumer households.


Households

$ (Rent, Wages, Interest, Profit) for Factors of Production


Goods and Services

(Product Market)



Click the money flow that represents the components of the income received by consumer

households.


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.



Goods and Services

(Product Market)



Click the flow that represents the National Income of the economy.


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.



Goods and Services

(Product Market)



Click the flow that represents the GDP (Gross Domestic Product) in the economy


Households

Analysis of the Model



Goods and Services

(Product Market)



Click the flow that represents the costs of production for business firms.


Households



Goods and Services

(Product Market)



Click the flow that represents the expenditures of income by consumer households:


Households



Goods and Services

(Product Market)





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



Goods and Services

(Product Market)





Households


to the next slide.

The real flow of __?__ in the __?__ market are used to produce the __?__ sold in the __?__ market


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.




Goods and Services

(Product Market)




Households


to the next slide.

Consumer households sell their __?__ in the __?__ market to

receive __?__ used to purchase __?__ in the __?__ market.


• 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:



Goods and Services

(Product Market)




Households

Click the market in the CFM that determines how goods will be produced:



Goods and Services

(Product Market)




Households

Click the market in the CFM that determines for whom goods are produced:



Goods and Services

(Product Market)




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.)


A. B.

C.

F.

G.

Check for understanding: Check Answers.

(Factor/Resource market)

(Product market)


Consumer Households

Business Firms

$ for factors of production (rent, wages, interest, profit)

$ for goods and services

Goods and Services

The end.

Analysis of: The Simple Circular Flow Model Objective: Analyze the simple circular flow model to...

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