Circular flow model

Circular Flow of a Market Economy


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Warm up: Why are entrepreneurs needed in the economy?

Chapter 2 Section Main Menu

What does an economy look like?


monetary flow

physical flow

monetary flow

physical flow

Circular Flow Diagram of a Market Economy

Households Firms

Circular Flow of a Market Economy• In a free market economy, households and

business firms use markets to exchange money and products.

–Households own the Factors of Production (land, labor and capital) and consume goods and services

– Firms produce goods by taking inputs (FOP) and turning them into outputs (finished products)


monetary flow

physical flow

monetary flow

physical flow


Households Firms

Product market

Factor (Resource) market

Households pay firms for goods and services.

Firms supply households with goods and services.

Households supply firms with land, labor, and capital.

Firms pay households for land, labor, and capital.


Factor Market = the exchange of Factors of Production (FOP) for money

Product Market = the exchange of finished products (G/S) for money


monetary flow

physical flow

monetary flow

physical flow


Households Firms

Product marketHouseholds pay firms for goods and services.

Firms supply households with goods and services.

Circular Flow of a Market Economy• Product Market

–Firms

• Supply the goods and services that they produce to the households

• Physical Exchange

–Households

• Pay the firms for goods and services that they need

• Monetary Exchange


monetary flow

physical flow

monetary flow

physical flow


Households Firms

Factor (Resource) Market

Households supply firms with land, labor, and capital.

Firms pay households for land, labor, and capital.

Circular Flow of a Market Economy• Factor (Resource) Market

–Households

• Supply the labor (workers) to firms as well as land (resources) and capital (investors)

• Physical exchange

–Firms

• Pay households for labor (salaries) and land as well as paying back investors (profits)

• Monetary exchange


Circular Flow Model Review (Worksheet)

Households Pay for G/S (Products) >>>>>>

<<<<<<Business Provide G/S (Products)

<<<<<<<Business Pay for FOP (Resources)

Households Provide FOP (Resources)>>>>>>



A. Taco Bell just hired you to assemble tacos ________ _____

B. You receive your first paycheck ($68.24) ________ _____

C. You order two tickets online for a concert ________ _____

D. Your tickets arrive by mail ________ _____

E. In which market are households buyers? ________ _____

F. In which market are households sellers? ________ _____

G. In which market are businesses buyers? ________ _____

H. In which market are businesses sellers? ________ _____

MARKET FLOW







Taco Bell just hired you to assemble tacos

Market:

Flow:

Resource (FOP)

Household provides FOP (Labor)







Taco Bell gives you first paycheck ($68.24)

Market:

Flow:

Resource (FOP)

Business Pay for FOP (Resources)







You buy two tickets online for a concert

Market:

Flow:

Product

Household pays for G/S







Your concert tickets arrive online

Market:

Flow:

Product

Business Provide for G/S







In which market are households buyers?

Product







In which market are households sellers?

Resource (FOP)







In which market are businesses buyers?

Resource







In which market are businesses sellers?

Product

Circular flow model

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