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    Circular Flow Model

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    Anonymous EmjOwX
    In a market economy, households and firms engage in exchanges in resource and product markets through voluntary trade. Resources are bought and sold in resource markets, with firms purchasing land, labor, and capital from households. In product markets, firms sell goods and services to households in exchange for money. Money flows in a circular pattern, with households using money from wages, rent, and interest to purchase resources, and firms using money from sales to purchase resources to produce more goods. An economy's income flow can remain the same, increase, or decrease depending on whether leakages from the economy through savings and taxes equal, are less than, or greater than injections from outside sources such as investment.

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    Circular Flow Model

    Uploaded by

    Anonymous EmjOwX
    22 views3 pages
    In a market economy, households and firms engage in exchanges in resource and product markets through voluntary trade. Resources are bought and sold in resource markets, with firms purchasing land, labor, and capital from households. In product markets, firms sell goods and services to households in exchange for money. Money flows in a circular pattern, with households using money from wages, rent, and interest to purchase resources, and firms using money from sales to purchase resources to produce more goods. An economy's income flow can remain the same, increase, or decrease depending on whether leakages from the economy through savings and taxes equal, are less than, or greater than injections from outside sources such as investment.

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    In a market economy, households and firms engage in exchanges in resource and product markets through voluntary trade. Resources are bought and sold in resource markets, with firms purchasing land, labor, and capital from households. In product markets, firms sell goods and services to households in exchange for money. Money flows in a circular pattern, with households using money from wages, rent, and interest to purchase resources, and firms using money from sales to purchase resources to produce more goods. An economy's income flow can remain the same, increase, or decrease depending on whether leakages from the economy through savings and taxes equal, are less than, or greater than injections from outside sources such as investment.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
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    22 views3 pages

    Circular Flow Model

    Uploaded by

    Anonymous EmjOwX
    In a market economy, households and firms engage in exchanges in resource and product markets through voluntary trade. Resources are bought and sold in resource markets, with firms purchasing land, labor, and capital from households. In product markets, firms sell goods and services to households in exchange for money. Money flows in a circular pattern, with households using money from wages, rent, and interest to purchase resources, and firms using money from sales to purchase resources to produce more goods. An economy's income flow can remain the same, increase, or decrease depending on whether leakages from the economy through savings and taxes equal, are less than, or greater than injections from outside sources such as investment.

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    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
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    Market Economy:

    - An economy in which households and firms engage in exchanges in both resource


    markets and in product markets that benefit both the firms and the households
    themselves.
    - Individuals stand to take benefit from the trades that take place in a market economy
    - Households posses three scarce resources (land, labor, and capital

    Resource Market:
    - This is where the entire circular flow begins
    - Firms will wish to acquire resources from households so that they can put these
    resources to use to make goods and services that they can sell back to households
    - Firms are the buyers in a resource market as they are buying resources from
    households

    Product Market:
    - Firms can begin manufacturing goods and services once they have obtained land, labor,
    and capital
    - In product markets, firms are the suppliers and households are the demanders
    - In order to acquire these goods and services that are demanded, money must exchange
    hands

    Circular Flow:

    - Inside a closed economy, the circular flow illustrates how the value of all outputs
    produces in an economy in 1 year is equal to the total income generated in producing
    that output
    - Money is what makes a circular flow function. Money incomes for households include
    wages, rent, and interest.
    - Money can be used for exchange in the resource market to acquire land, labor, and
    capital (factors of production)
    Leakages and Injections:
    - In an open economy, there are leakages and injections
    - Leakages are the resources that leave the circular flow
    - Injections are the resources that are introduced into the circular flow

    Depending on the size of the leakages and injections, the circular (income) flow will either
    remain the same, get bigger, or get smaller
    1. Leakages = Injections - Income flow remains the same
    2. Leakages > Injections - Income flow is smaller
    3. Leakages < Injections - Income flow is larger

    Goals of Firms Goals of Households

    Maximize profits by selling goods and Maximize utility (happiness) through


    services for more than they spent on consumption of goods and services
    resources (profit)

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