A Circular Flow Diagram
a. Illustrate by means of a circular flow
diagram, the Product market; the
Resource market; the real flow of
goods and services between and
among businesses, households, and
government; and the flow of money.
A Circular Flow Diagram
• Shows the economic flow of
goods and services between
households, businesses, and
government through the
product and resource markets.
Definitions
(1 of 3)
• household – individual or group that
occupy a single housing unit (residence)
• business – individual or group that work
to produce a good or service
• government – provides law and order,
structure, and even necessary goods and
services that the market might not provide
Definitions (2 of 3)
• product market – goods sold for final
consumption to a consumer (which could
be a household, business, or the
government) are sold in the product
market
• resource (or factor) market – to improve
production, producers buy the four factors
of production (land, labor, capital, and
entrepreneurship) in the resource market
Circular Flow of Economic Activity
Product
Market
Fees
Spending
Goods
&
Services
Taxes & “Tax Breaks” Households
Business
Taxes & “Tax Breaks” Government
Buy Factors
of
Production
or
Individuals
Fees
Spending
Factor
or
Resource
Market
So What?
• Since money flows in a circular flow
between households, businesses, and
government, then each depends on the
other for the economy to function
smoothly. This is called economic
interdependence.
The Role of Money
b. Explain the role of money and how it
facilitates exchange.
The Role of Money
• medium of exchange – a method or
agreed upon standard (other than
exchanging products or labor) for
exchanging one thing for another. The
modern medium of exchange is money.
• Money is NOT what people want. Money
is used to buy what people want.