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The Circular Flow of Economic Activity
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Main Idea #1:
Firms go to the Factor Market to buy or hire resources that they need to produce goods and services. They pay Households wages, rent and other forms of money for these resources. Firms use these resources to produce goods and services for sale in the Product Market
Main Idea # 2:
Households take their resources to the Factor Market and sell them for wages, rent and other forms of money. They then take this money to the Product Market to buy goods and services.
The Factor Market
Factors of Production
Wages, rent, profit, etc.
The Product Market
Consumer expenditure for goods and services
Final Goods and Services
The Circular Flow of Economic Activity
Everything we buy (food, clothes, services, etc.)
Where does this exchange take place?
Before we start- Some clues to remember as you take notes...
What are the two main characters in the market economy and what are different words for each?
Where Households and Firms make deals about final goods
What do Firms do with the money they get from consumer expenditure?
Anything written in a red circle is a question on your notes sheet. Look out for answers soon!
Money spent to buy the things we want
Households
Any words in RED are important vocabulary words and might be answers to a question on your notes sheet.
So let's explain this a little more...
What do Firms pay in return for these resources?
Consumers like you and me!
Want to review one more time?
http://www.classzone.com/cz/books/econ_cnc/resources/htmls/animated_economics/ec02_anim_circflow.html
What do Households do with this money?
Businesses and Producers
Where does this exchange take place?
Firms
What Do Households have to offer in a market economy?
Where Households and Firms meet to make deals about "stuff that makes stuff"
Who do Households offer these resources to?
What are Factors of Production?
- Natural Resources
- Capital (money, land, or time)
- Human Resources (ideas)
- Skills