Circular Flow in a
Market Economy
Where does your money go?
Map your dollar
Imagine you stop at your favorite fast food restaurant after school today
and buy one item off the dollar menu. Where are all the places your
dollar goes after it leaves your pocket?
The Exchange of Products and Resources

Market: a place where buyers and sellers meet to engage in mutually
beneficial exchanges with one another.

There are two types of markets in a Market Economy: The Product Market and
the Resource Market.

There are two main players in a Market Economy: The Households(Consumers)
and the Firms (Businesses)
Households

Have 3 scarce resources:
Land: Natural Resources
Labor: Human Resources = workers
Capital: Anything used to make another product. Capital from households also
includes money.
Firms

Established by entrepreneurs: people from households who start their own
businesses.

Need resources from the households to make goods and services to sell back
to the households.
Resource Markets

Households sell, Firms buy: factors of production (land, labor and capital).

Money for land= Rent

Money for labor= Income

Money for capital= Interest

Money is the incentive for households to participate in the resource market. It
allows them to receive goods and services in the product market.
Money
Resources
Product Markets

Firms sell, Households buy: goods and services

Firms produce goods and services to sell with factors of production
purchased from households.

Households pay for goods and services with money acquired in Resource
market (income)
Goods/Services
Money
The Circular Flow Model
Goals
Firms


Maximize profits (total revenue is
greater than total cost)
Sell goods and services for more
than they spent on resources
Households

Maximize utility (happiness)

Happiness is achieved through the
consumption of goods and services
The Government in the Circular Flow
Model

Since a pure free market has never existed the government also falls into the
circular flow model.

The government purchases goods and services from firms, and factors of
production from households

The government collects money from both households and firms in the form
of taxes

The government also provides goods and services to firms and households:
roads, social programs, subsidies (financial aid to businesses or individuals)
etc.
Taxes
Purchases
Factors
Expenditures
Mixed Economy Circular Flow Model
How do YOU Fit Into the Circular Flow

List all expenditures and activities you did this weekend that required
spending money (could be spent by you or someone else)

Create a circular flow chart showing how your activities fit into the flow.