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Circular Flow: A Model Explaining The Movement of Money in The Economy

The circular flow model shows the continuous movement of money between households and businesses in the economy. Households provide resources like labor, capital, and land to businesses, and receive income in return. Businesses then use those resources to produce goods and services, which they sell back to households. The money households spend on goods and services circulates back to businesses, completing the circular flow between production and consumption in the economy.

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Sarah Hardy
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70 views16 pages

Circular Flow: A Model Explaining The Movement of Money in The Economy

The circular flow model shows the continuous movement of money between households and businesses in the economy. Households provide resources like labor, capital, and land to businesses, and receive income in return. Businesses then use those resources to produce goods and services, which they sell back to households. The money households spend on goods and services circulates back to businesses, completing the circular flow between production and consumption in the economy.

Uploaded by

Sarah Hardy
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
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Circular flow

A model explaining the movement


of money in the economy

Transactions: the circular flow diagram

The circular-flow model


is a visual representation of
the relationship between
businesses and individuals.

The theory
As long as you give your resources to
business and they give resources back to
you, the economy functions well.

The relationship is a two-way street

Circular flow of economic activities


A household is a person or a group of people that
share their income. (CONSUMER)
A business aka a firm is an organization that
produces goods and services for sale. (PRODUCER)

Households
The household sector includes the entire
population of society. It includes all of the
consumption - seeking members of society-the entire population. It IS society. In effect,
the economy exists to satisfy the wants and
needs of the household sector.

Lets return to our definition of


economics...
Economics is a social science
concerned with the way SOCIETY chooses to employ
its limited resources
to produce goods and services
for present and future consumption.

Households (consumers)
Households (consumers) own and control resources (factors of
production) and sell them to businesses.

Natural resources
Capital

Labor

Households
Households play the leading role in the economy. As
consumers, households demand the goods and
services produced. As resource owners, households
supply the resources used to produce goods and
services.
- Contemporary Economics

Businesses (producers) use


these resources (natural
resources, labor, capital,
entrepreneurs) to create
finished products.

Finally, businesses
(producers) take finished
products and sell them to
households (consumers)

Circular Flow Model


Firms create goods and services for
households to buy (consume).
Households provide factors of
production to firms.
Firms provide wages to workers.
Households act as consumers for the
goods and services firms produce.

The Circular Flow of Economic Activity

The flow of payments in an economy is a


circular flow.

Individuals--people living in households-work for businesses (labor), rent their


property (or their capital) to businesses,
and manage and own the businesses

The Circular Flow of Economic


Activity
All these activities generate incomes-flows of payments from businesses to
households.
But households then spend their
incomes--on consumption goods, in
taxes paid to governments, and on

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