Transcript The Circular Flow Model

Warm-up
On a piece of paper, describe
how you think individuals
(consumers), businesses
(producers), and the
government interact with each
other in today’s economy.
The Circular Flow Model
How Things Work in a
Mixed-Market Economic System
In our economic system there are two sectors
the business sector and the household sector
Households
• Demand consumer
goods, like: cars,
computers, washers,
lawnmowers, etc.
• Households provide
labor resources to
business and own
most of the resources
of production
Businesses
• Produce and supply
goods and services
• Businesses demand
resources for
production: land,
labor, capital, and
entrepreneurs
These two sectors interact in two markets:
the Product Market and the Factor Market
Product Markets
• are the markets where households acquire
finished (consumer) goods & services.
• The markets we are most familiar with are
retail markets.
• Examples include: Wal-Mart, gas stations,
Burger King, Best Buy, the dentist.
Product
Markets
Factor Markets
• are the markets where business acquire the
factors of production (land, labor, capital..)
• When you are looking for a job you are in
the factor (labor) market.
• Examples include: Cowan Equipment, IBM
Business Solutions, Snelling Personnel
Product
Markets
Businesses produce goods and provide
services in the product market.
In exchange households pay for goods &
services with consumption expenditures
(money)
Factor
Markets
Product
Markets
Households provide labor, own land,
invest in capital and have the talent
businesses need to produce goods and
services.
To pay for these resources business pay
wages and salaries, pay rent, purchase raw
material, pay dividends to households.
Factor
Markets
Product
Markets
goods & services…
….goods & services
….consumption spending….
….salaries, wages, rent, dividends…..
land, labor, capital……
Factor
Markets
…entrepreneurial ability
Product
Markets
goods & services…
….goods & services
….consumption spending….
In a mixed economy its not always this
simple, something is missing.
The Government
….salaries, wages, rent, dividends…..
land, labor, capital……
Factor
Markets
…entrepreneurial ability
Governments
• Federal, State, & Local
• Governments require
resources to provide
services
• To purchase these
resources governments
collect taxes
• Government spending
makes up 20% of GDP
Product
Markets
goods & services…
….goods & services
….consumption spending….
….salaries, wages, rent, dividends…..
land, labor, capital……
Factor
Markets
…entrepreneurial ability
Product
Markets
goods & services…
….goods & services
….consumption spending….
Personal
Income Taxes
Corporate Income
Taxes
….salaries, wages, rent, dividends…..
land, labor, capital……
Factor
Markets
…entrepreneurial ability
Product
Markets
goods & services…
….goods & services
….consumption spending….
Personal
Income Taxes
transfer payments
subsidies
Corporate Income
Taxes
….salaries, wages, rent, dividends…..
land, labor, capital……
Factor
Markets
…entrepreneurial ability
Product
Markets
goods & services…
….goods & services
….consumption spending….
Personal
Income Taxes
transfer payments
subsidies
Corporate Income
Taxes
….salaries, wages, rent, dividends…..
land, labor, capital……
Factor
Markets
…entrepreneurial ability
Any Questions?
Are you sure???
Factor
Market
Consumer
Sector
Gov’t
Sector
Product
Market
Business
Sector
The Four Factors of Production
1. Land [natural resources] – [“gifts of nature”]
.
Water
Wind
Sun
Fossil fuels
“Gifts of Nature”
2.
Labor [human resources]
anyone who works [“paid work”]
A. Physical – pro athletes & lumberjacks
B. Intellectual – accountants & lawyers
.
“Hired Help”
3. Capital Resources – all “man-made inputs” used to produce
consumer products (machinery, physical plants, & tools).
A. Capital goods – goods [machinery, buildings, & tools] used to
produce other goods. [crane, Ford plant, hammer]
.
Real Capital v. Financial Capital
Notes...
INVESTMENT
REAL CAPITAL
.
[tools, machinery, & factories]
Can produce something
directly with these
FINANCIAL CAPITAL
Can’t produce anything
directly with these
[stocks, bonds, & money]
Rent
Land
Wages
Labor
Interest
Capital
Profits
Entrepreneur
.
4. Entrepreneurship – Combines land, labor, & capital to
produce products.
Resource payments. The resource owners receive rent [for
the use of their land; wages [for their labor]; interest [payment
for financial capital], and profits [for their entrepreneurial ability].
The Harley Hog Circular Flow
Resource
Product
Market
Market
Hog CIRCULAR FLOW MODEL
RESOURCE MARKET
1
2
Mechanic
Flow 4. Goods/services
Flow 3: Consumer expenditures
BUSINESSES
3
4
PRODUCT MARKET
HOUSEHOLDS
Hog CIRCULAR FLOW MODEL
RESOURCE MARKET
1
2
Mechanic
Flow 4. Goods/services
HOUSEHOLDS
Flow 3: Consumer expenditures
Flow 1: Land, Labor, Capital, Entrepreneur
Flow 2: Rent, Wages, Interest, Profits
BUSINESSES
3
4
PRODUCT MARKET
CIRCULAR FLOW MODEL
RESOURCE MARKET
BUSINESSES
Businesses supply hogs g/s
I demand that hog & will pay.
Mechanic
PRODUCT MARKET
Householders demand hogs & will pay
HOUSEHOLDS
CIRCULAR FLOW MODEL
Resource Market
RESOURCE
MARKET
Mechanic
Householders
Businesses
BUSINESSES
Show me the money!
& you’ll get this hog.
GOODS &
SERVICES
$ REVENUE
HOUSEHOLDS
GOODS &
SERVICES
PRODUCT
MARKET
$CONSUMPTION
CIRCULAR FLOW MODEL
Resource Market
RESOURCE
MARKET
Mechanic
I demanded this hog and
had to pay for it.
Householders
Businesses
BUSINESSES
Show me the money!
& you’ll get this hog.
GOODS &
SERVICES
$ REVENUE
HOUSEHOLDS
GOODS &
SERVICES
PRODUCT
MARKET
$CONSUMPTION
CIRCULAR FLOW MODEL
Resource Market
RESOURCE
MARKET
HH supply hog labor
Mechanic
H.D. demands hog labor & will pay
Businesses
BUSINESSES
Householders
Show me the money!
& you’ll get this hog.
GOODS &
SERVICES
$ REVENUE
I demanded this hog and
had to pay for it.
HOUSEHOLDS
GOODS &
SERVICES
PRODUCT
MARKET
$CONSUMPTION
CIRCULAR FLOW MODEL
Resource Market
$ COSTS
BUSINESSES Give me your hog labor
$ INCOMES
&
I’ll show you the money.
HOUSEHOLDS
GOODS &
GOODS &
PRODUCT MARKET
SERVICES
SERVICES
CIRCULAR FLOW MODEL
Resource Market
$ COSTS
BUSINESSES
$ INCOMES
I supplied hog labor
& was paid..
HOUSEHOLDS
GOODS &
GOODS &
PRODUCT MARKET
SERVICES
SERVICES
CIRCULAR FLOW MODEL
$ COSTS
$ INCOMES
RESOURCE
MARKET
RESOURCES
INPUTS
BUSINESSES
HOUSEHOLDS
GOODS &
SERVICES
GOODS &
SERVICES
PRODUCT
MARKET
$ REVENUE
$ CONSUMPTION
The Circular-Flow Diagram
Product Market
1
2
2
1
4
Households
3
What flow are the following?
A. Consumer expenditures?
B. Goods and services?
C. Land, labor, capital,
and entrepreneurs?
D. Rent, wages, interest,
and profits?
Labor
3
4
Resource Market
Businesses
Businesses
The Circular-Flow Diagram
Resource Market
1
2
Businesses
Businesses
What flow are the following?
4 A. Goods/services?
3 B. Consumer expenditures?
1 C. Land, labor, capital and
entrepreneurial ability?
2 D. Rent, wages, interest,
Households
and profits?
3
4
Product Market
NS 56-59
Fuzzy Wuzzy
56. In the product market (householders/businesses) are the
demanders and (householders/businesses) are the suppliers.
57. In the resource market (householders/businesses) are the
demanders and (householders/businesses) are the suppliers.
58. In the resource market, (householders/businesses)
sell resources to (householders/businesses).
59. In the product market, (householders/businesses) sell
products goods/services to (householders/businesses).