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Circular Flow Model

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michelle ashmore

on 28 September 2017

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Transcript of Circular Flow Model

how the government, businesses and individuals interact
Circular Flow Model
Producers v. Consumers
Producers - own businesses that make the goods and services.
In Economics these interactions are shown on the Circular Flow diagram
The top of the diagram is called the PRODUCT market
because this is where the producers sell consumers the goods they made
The bottom of the diagram is called the FACTOR or RESOURCE market
because it involves the Factors of Production --- land, labor, capital, and entrepreneurship
Because all Economic Systems are MIXED the Government is involved...
households and businesses pay taxes to the Government
How do producers/entrepreneurs make goods and services?
Cacao tree
Chocolate bar
Consumers - people, households, families that participate in voluntary exchange (trade in which both parties are satisfied)
Consumers buy stuff... but where does the money come from?
Mary goes to bake at the chocolate factory
Fred has 500 acres and Candy Inc. decides to grow cacao trees on his land, so he gets paid for the use of land
Tom lets Candy Inc use his 200 gallon mixer and gets paid interest
and then we buy chocolate, because it is YUMMY!
the Government provides us with public goods and services
the Government also hires workers... like mail carriers and teachers
ppl give land, labor, or capital to businesses
businesses pay people in the form of rent (land), wages (labor), interest (capital)
businesses provide goods
we pay for the goods
Now lets look at the Circular flow Model put together...
land, labor, capital
Product Market
Factor Market
The diagram may look confusing... just remember ---
provide Land, Labor, Capital
in order to get money so they can buy stuff
pay for the Land, labor, and capital
in order to make goods
everyone is happy because of
Voluntary Exchange!
Which number represents the flow of work/labor?
a) 1 c) 3
b) 2 d) 4
which set of numbers show
the flow of money to the producer?
a) 1-2 b) 3-4 c) 5-6 d) 7-8
Micheal goes to work at Starbucks and gets paid $7 an hour. What market is he operating in?

a) Productivity
b) Product
c) Factor
d) Scarcity
What does the Government provide for people and businesses?

In exchange for what?
labor = work = wages
land = rent for use
capital = interest
Candy Inc.
Candy Inc.
Full transcript