Circular Flow

Transactions: The Circular-Flow

Diagram
Trade takes the form of barter when
people directly exchange goods or
services that they have for goods or
services that they want.

The circular-flow diagram is a

model that represents the transactions
in an economy by flows around a circle.
The Circular-Flow Diagram
The Circular Flow

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 Circular-Flow of Economic
Activities
A household is a person or a group of people that
share their income.

A firm is an organization that produces goods and

services for sale.

Firmssell goods and services that they produce to

households in markets for goods and services.

Firms buy the resources they need to produce—

factors of production—in factor markets.
 Macroeconomics vs.
Microeconomics

MICROECONOMIC MACROECONOMIC
QUESTION QUESTION
Go to business school or take How many people are
a job? employed in the economy as a
whole?
What determines the salary What determines the overall
offered by Citibank to Cherie salary levels paid to workers
Camajo, a new Columbia MBA? in a given year?

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 Macroeconomics vs.
Microeconomics
MICROECONOMIC MACROECONOMIC
QUESTION QUESTION
What determines the cost to a What determines the overall
university or college of offering level of prices in the economy
a new course? as a whole?
What government policies What government policies
should be adopted to make it should be adopted to promote
easier for low-income students full employment and growth
to attend college? in the economy as a whole?
What determines whether What determines the overall
Citibank opens a new office in trade in goods, services and
Shanghai? financial assets between the
US and the rest7 of the world?
Macroeconomics vs. Microeconomics

 Microeconomics focuses on how decisions are made by individuals

and firms and the consequences of those decisions.

Ex.: How much it would cost for a university or college to offer a

new course ─ the cost of the instructor’s salary, the classroom
facilities, the class materials, and so on.
Having determined the cost, the school can then decide whether or
not to offer the course by weighing the costs and benefits.

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Macroeconomics vs. Microeconomics

 Macroeconomics examines the aggregate behavior of the economy

(i.e. how the actions of all the individuals and firms in the
economy interact to produce a particular level of economic
performance as a whole).
Ex.: Overall level of prices in the economy (how high or how low
they are relative to prices last year) rather than the price of a
particular good or service

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 Positive vs. Normative
Economics
 Positive economics - an attempt to
describe how the economy operates
using the scientific method.
 Normative economics - relies on value
judgments to evaluate the overall
functioning of the economy.
A normative statement is a value judgement
and states what someone thinks ‘ought to be’.

Normative statements are subjective and

influenced by personal biases, background,
personal politics

An example of a normative statement:

To clean up air quality and cut down carbon

emissions by 25%, 4 x 4 vehicles should only be
sold to farmers and those living in rough
terrain areas.
Economists must always use positive statements
when making responses, not normative.
A positive statement is one that is objective
and can be backed up by evidence.

An example of a positive statement:

If carbon emissions were cut by 25%, air

quality would improve and the number of
people diagnosed with asthma would decrease
significantly.
 THOUGHT OF THE DAY

Two things Indicate WEAKNESS

 One, to be silent when it is proper
time to speak
 Second, to speak when it is proper
time to be silent.