Analysis of:
The Simple
Circular Flow Model
Objective:
Analyze the simple circular flow
model to detect relationships
among its:
• sectors
• markets
• flows
The Circular Flow Model
Goods and Services
Payments for Goods and Services
(Product Market)
Business Firms
(Factor or Resource Market)
Consumer
Households
Payments (RWIP) for Factors of Production
(Factors of Production (land, labor ,capital, entrepreneurship)
The assumptions of the Circular
Flow Model (CFM) are the
characteristics of capitalism.
All of the following are assumptions
of the circular flow model,
EXCEPT:
•
•
•
•
•
•
•
Economic freedom
Private property
Economic incentives (profit motive)
Competitive markets
A price system based on supply and demand
Involuntary exchanges
Limited government
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
Click separately on the two major
sectors of the CFM.
Goods and Services
Payments for Goods and Services
(Product Market)
Business Firms
(Factor or Resource Market)
Consumer
Households
Payments (RWIP) for Factors of Production
(Factors of Production (land, labor ,capital, entrepreneurship)
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
Payments for Goods and Services
(Product Market)
Business Firms
(Factor or Resource Market)
Consumer
Households
Payments (RWIP) for Factors of Production
(Factors of Production (land, labor ,capital, entrepreneurship)
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)
Click the flow that represents the money flow
in the product market
Goods and Services
Payments for Goods and Services
(Product Market)
Business Firms
(Factor or Resource Market)
Consumer
Households
Payments (RWIP) for Factors of Production
(Factors of Production (land, labor ,capital, entrepreneurship)
Click the flow that represents the money flow
in the factor or resource market
Goods and Services
Payments for Goods and Services
(Product Market)
Business Firms
(Factor or Resource Market)
Consumer
Households
Payments (RWIP) for Factors of Production
(Factors of Production (land, labor ,capital, entrepreneurship)
Click the flow that represents the real flow in
the product market
Goods and Services
Payments for Goods and Services
(Product Market)
Business Firms
(Factor or Resource Market)
Consumer
Households
Payments (RWIP) for Factors of Production
(Factors of Production (land, labor ,capital, entrepreneurship)
Click the flow that represents the real flow in
the factor or resource market
Goods and Services
Payments for Goods and Services
(Product Market)
Business Firms
(Factor or Resource Market)
Consumer
Households
Payments (RWIP) for Factors of Production
(Factors of Production (land, labor ,capital, entrepreneurship)
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
Payments for Goods and Services
(Product Market)
Business Firms
(Factor or Resource Market)
Consumer
Households
Payments (RWIP) for Factors of Production
(Factors of Production (land, labor ,capital, entrepreneurship)
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
Payments for Goods and Services
(Product Market)
Business Firms
(Factor or Resource Market)
Consumer
Households
Payments (RWIP) for Factors of Production
(Factors of Production (land, labor ,capital, entrepreneurship)
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
Payments for Goods and Services
(Product Market)
Business Firms
(Factor or Resource Market)
Consumer
Households
Payments (RWIP) for Factors of Production
(Factors of Production (land, labor ,capital, entrepreneurship)
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
Payments for Goods and Services
(Product Market)
Business Firms
(Factor or Resource Market)
Consumer
Households
Payments (RWIP) for Factors of Production
(Factors of Production (land, labor ,capital, entrepreneurship)
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).
Click the source (sector and market) of the
income received by consumer households.
Goods and Services
Payments for Goods and Services
(Product Market)
Business Firms
(Factor or Resource Market)
Consumer
Households
Payments (RWIP) for Factors of Production
(Factors of Production (land, labor ,capital, entrepreneurship)
Click the money flow that represents the
components of the income received by
consumer households.
Goods and Services
Payments for Goods and Services
(Product Market)
Business Firms
(Factor or Resource Market)
Consumer
Households
$ (Rent, Wages, Interest, Profit) for Factors of Production
(Factors of Production (land, labor ,capital, entrepreneurship)
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.
Click the flow that represents the National
Income of the economy.
Goods and Services
Payments for Goods and Services
(Product Market)
Business Firms
(Factor or Resource Market)
Consumer
Households
Payments (RWIP) for Factors of Production
(Factors of Production (land, labor ,capital, entrepreneurship)
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.
Click the flow that represents the GDP
(Gross Domestic Product) in the economy
Goods and Services
Payments for Goods and Services
(Product Market)
Business Firms
(Factor or Resource Market)
Consumer
Households
Payments (RWIP) for Factors of Production
(Factors of Production (land, labor ,capital, entrepreneurship)
Analysis of the Model
Click the flow that represents the costs of
production for business firms.
Goods and Services
Payments for Goods and Services
(Product Market)
Business Firms
(Factor or Resource Market)
Consumer
Households
Payments (RWIP) for Factors of Production
(Factors of Production (land, labor ,capital, entrepreneurship)
Click the flow that represents the expenditures
of income by consumer households:
Goods and Services
Payments for Goods and Services
(Product Market)
Business Firms
(Factor or Resource Market)
Consumer
Households
Payments (RWIP) for Factors of Production
(Factors of Production (land, labor ,capital, entrepreneurship)
The Circular Flow Model
Goods and Services
Payments for Goods and Services
(Product Market)
Business Firms
(Factor or Resource Market)
Consumer
Households
Payments (RWIP) for Factors of Production
(Factors of Production (land, labor ,capital, entrepreneurship)
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
The Circular Flow Model
Goods and Services
Payments for Goods and Services
(Product Market)
Business Firms
(Factor or Resource Market)
Consumer
Households
Payments (RWIP) for Factors of Production
(Factors of Production (land, labor ,capital, entrepreneurship)
Discuss and determine an answer
to the following before going on
to the next slide.
The real flow of __?__ in the
__?__ market are used to produce
the __?__ sold in the __?__
market
Go back to
view model
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.
The Circular Flow Model
Goods and Services
Payments for Goods and Services
(Product Market)
Business Firms
(Factor or Resource Market)
Consumer
Households
Payments (RWIP) for Factors of Production
(Factors of Production (land, labor ,capital, entrepreneurship)
Discuss and determine an answer
to the following before going on
to the next slide.
Consumer households sell their
__?__ in the __?__ market to
receive __?__ used to purchase
__?__ in the __?__ market.
Go back to
view model
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.
Click the market in the CFM that
determines what will be produced:
Goods and Services
Payments for Goods and Services
(Product Market)
Business Firms
(Factor or Resource Market)
Consumer
Households
Payments (RWIP) for Factors of Production
(Factors of Production (land, labor ,capital, entrepreneurship)
Click the market in the CFM that
determines how goods will be produced:
Goods and Services
Payments for Goods and Services
(Product Market)
Business Firms
(Factor or Resource Market)
Consumer
Households
Payments (RWIP) for Factors of Production
(Factors of Production (land, labor ,capital, entrepreneurship)
Click the market in the CFM that
determines for whom goods are produced:
Goods and Services
Payments for Goods and Services
(Product Market)
Business Firms
(Factor or Resource Market)
Consumer
Households
Payments (RWIP) for Factors of Production
(Factors of Production (land, labor ,capital, entrepreneurship)
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.
(Factors of Production (land, labor ,capital, entrepreneurship)
C.
(D.)
A.
B.
(E.)
F.
G.
Check for understanding: Check
Answers.
(Factors of Production (land, labor ,capital, entrepreneurship)
$ for factors of production (rent, wages, interest, profit)
Consumer
Households
(Factor/Resource market)
(Product market)
$ for goods and services
Goods and Services
Business
Firms
The end.