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Analysis of: The Simple Circular Flow Model Objective: Analyze the simple circular flow model to detect relationships among its: sectors markets flows The Circular ... – PowerPoint PPT presentation

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Title: Analysis of:


1
Analysis of
  • The Simple
  • Circular Flow Model

2
Objective
  • Analyze the simple circular flow model to detect
    relationships among its
  • sectors
  • markets
  • flows

3
The Circular Flow Model
Goods and Services
Payments for Goods and Services
(Product Market)
Business Firms
Consumer Households
(Factor or Resource Market)
Payments (RWIP) for Factors of Production
(Factors of Production (land, labor ,capital,
entrepreneurship)
4
The assumptions of the Circular Flow Model (CFM)
are the characteristics of capitalism.
5
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

6
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.
7
Identification of the components of the Circular
Flow Model
  • Sectors
  • Markets
  • Flows

8
Click separately on the two major sectors of the
CFM.
Goods and Services
Payments for Goods and Services
(Product Market)
Business Firms
Consumer Households
(Factor or Resource Market)
Payments (RWIP) for Factors of Production
(Factors of Production (land, labor ,capital,
entrepreneurship)
9
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)

10
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
Consumer Households
(Factor or Resource Market)
Payments (RWIP) for Factors of Production
(Factors of Production (land, labor ,capital,
entrepreneurship)
11
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)

12
Click the flow that represents the money flow in
the product market
Goods and Services
Payments for Goods and Services
(Product Market)
Business Firms
Consumer Households
(Factor or Resource Market)
Payments (RWIP) for Factors of Production
(Factors of Production (land, labor ,capital,
entrepreneurship)
13
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
Consumer Households
(Factor or Resource Market)
Payments (RWIP) for Factors of Production
(Factors of Production (land, labor ,capital,
entrepreneurship)
14
Click the flow that represents the real flow in
the product market
Goods and Services
Payments for Goods and Services
(Product Market)
Business Firms
Consumer Households
(Factor or Resource Market)
Payments (RWIP) for Factors of Production
(Factors of Production (land, labor ,capital,
entrepreneurship)
15
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
Consumer Households
(Factor or Resource Market)
Payments (RWIP) for Factors of Production
(Factors of Production (land, labor ,capital,
entrepreneurship)
16
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.
17
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
Consumer Households
(Factor or Resource Market)
Payments (RWIP) for Factors of Production
(Factors of Production (land, labor ,capital,
entrepreneurship)
18
Correct! In the product market
  • Consumer households (demanders) make payments
    (money flow) to purchase goods and services
  • from
  • Business firms

19
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
Consumer Households
(Factor or Resource Market)
Payments (RWIP) for Factors of Production
(Factors of Production (land, labor ,capital,
entrepreneurship)
20
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).

21
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
Consumer Households
(Factor or Resource Market)
Payments (RWIP) for Factors of Production
(Factors of Production (land, labor ,capital,
entrepreneurship)
22
Correct! In the factor or resource market
  • Business firms (demanders) make payments (money
    flow) to purchase factors of production
  • from
  • Consumer households

23
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
Consumer Households
(Factor or Resource Market)
Payments (RWIP) for Factors of Production
(Factors of Production (land, labor ,capital,
entrepreneurship)
24
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).

25
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
Consumer Households
(Factor or Resource Market)
Payments (RWIP) for Factors of Production
(Factors of Production (land, labor ,capital,
entrepreneurship)
26
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
Consumer Households
(Factor or Resource Market)
(Rent, Wages, Interest, Profit) for Factors of
Production
(Factors of Production (land, labor ,capital,
entrepreneurship)
27
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.

28
Click the flow that represents the National
Income of the economy.
Goods and Services
Payments for Goods and Services
(Product Market)
Business Firms
Consumer Households
(Factor or Resource Market)
Payments (RWIP) for Factors of Production
(Factors of Production (land, labor ,capital,
entrepreneurship)
29
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.

30
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
Consumer Households
(Factor or Resource Market)
Payments (RWIP) for Factors of Production
(Factors of Production (land, labor ,capital,
entrepreneurship)
31
Analysis of the Model
32
Click the flow that represents the costs of
production for business firms.
Goods and Services
Payments for Goods and Services
(Product Market)
Business Firms
Consumer Households
(Factor or Resource Market)
Payments (RWIP) for Factors of Production
(Factors of Production (land, labor ,capital,
entrepreneurship)
33
Click the flow that represents the expenditures
of income by consumer households
Goods and Services
Payments for Goods and Services
(Product Market)
Business Firms
Consumer Households
(Factor or Resource Market)
Payments (RWIP) for Factors of Production
(Factors of Production (land, labor ,capital,
entrepreneurship)
34
The Circular Flow Model
Goods and Services
Payments for Goods and Services
(Product Market)
Business Firms
Consumer Households
(Factor or Resource Market)
Payments (RWIP) for Factors of Production
(Factors of Production (land, labor ,capital,
entrepreneurship)
35
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
36
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

37
The Circular Flow Model
Goods and Services
Payments for Goods and Services
(Product Market)
Business Firms
Consumer Households
(Factor or Resource Market)
Payments (RWIP) for Factors of Production
(Factors of Production (land, labor ,capital,
entrepreneurship)
38
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
39
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.

40
The Circular Flow Model
41
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
42
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.

-
43
Click the market in the CFM that determines what
will be produced
Goods and Services
Payments for Goods and Services
(Product Market)
Business Firms
Consumer Households
(Factor or Resource Market)
Payments (RWIP) for Factors of Production
(Factors of Production (land, labor ,capital,
entrepreneurship)
44
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
Consumer Households
(Factor or Resource Market)
Payments (RWIP) for Factors of Production
(Factors of Production (land, labor ,capital,
entrepreneurship)
45
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
Consumer Households
(Factor or Resource Market)
Payments (RWIP) for Factors of Production
(Factors of Production (land, labor ,capital,
entrepreneurship)
46
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.
47
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.
48
Check for understanding Check Answers.
(Factors of Production (land, labor ,capital,
entrepreneurship)
for factors of production (rent, wages,
interest, profit)
(Factor/Resource market)
Consumer Households
Business Firms
(Product market)
for goods and services
Goods and Services
49
The end.
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