A Circular Flow Diagram

1
A Circular Flow Diagram

1. Illustrate by means of a circular flow diagram,
   the Product market the Resource market the real
   flow of goods and services between and among
   businesses, households, and government and the
   flow of money.

SSEMI1 The student will describe how households,
businesses, and governments are interdependent
and interact through flows of goods, services,
and money.
2
A Circular Flow Diagram

• Shows the economic flow of goods and services
  between households, businesses, and government
  through the product and resource markets.

SSEMI1a Illustrate by means of a circular flow
diagram, the Product market the Resource market
the real flow of goods and services between and
among businesses, households, and government and
the flow of money.
3
According to the standard, whats missing from
the diagram? According to the
standard, whats missing from the diagram?
According to the standard, whats missing
from the diagram?
SSEMI1a Illustrate by means of a circular flow
diagram, the Product market the Resource market
the real flow of goods and services between and
among businesses, households, and government and
the flow of money.
4
Definitions
(1 of 3)

• household individual or group that occupy a
  single housing unit (residence)
• business individual or group that work to
  produce a good or service
• government provides law and order, structure,
  and even necessary goods and services that the
  market might not provide

SSEMI1a Illustrate by means of a circular flow
diagram, the Product market the Resource market
the real flow of goods and services between and
among businesses, households, and government and
the flow of money.
5
Definitions (2 of 3)

• product market goods sold for final consumption
  to a consumer (which could be a household,
  business, or the government) are sold in the
  product market
• resource (or factor) market to improve
  production, producers buy the four factors of
  production (land, labor, capital, and
  entrepreneurship) in the resource market

SSEMI1a Illustrate by means of a circular flow
diagram, the Product market the Resource market
the real flow of goods and services between and
among businesses, households, and government and
the flow of money.
6
Circular Flow of Economic Activity
ProductMarket
Business Income
Consumer Spending
Goods Services
Goods Services
Spending
Fees
HouseholdsorIndividuals
Business
Government
Taxes Tax Breaks
Taxes Tax Breaks
Buy FactorsofProduction
Fees
Land, CapitalLabor, Entrepreneurs
Spending
Payment for Resources
FactororResourceMarket
Income from Resources
SSEMI1a Illustrate by means of a circular flow
diagram, the Product market the Resource market
the real flow of goods and services between and
among businesses, households, and government and
the flow of money.
7
So What?

• Since money flows in a circular flow between
  households, businesses, and government, then each
  depends on the other for the economy to function
  smoothly. This is called economic
  interdependence.

SSEMI1a Illustrate by means of a circular flow
diagram, the Product market the Resource market
the real flow of goods and services between and
among businesses, households, and government and
the flow of money.
8
The Role of Money

1. Explain the role of money and how it facilitates
   exchange.

SSEMI1 The student will describe how households,
businesses, and governments are interdependent
and interact through flows of goods, services,
and money.
9
The Role of Money

• medium of exchange a method or agreed upon
  standard (other than exchanging products or
  labor) for exchanging one thing for another. The
  modern medium of exchange is money.
• Money is NOT what people want. Money is used to
  buy what people want.

SSEMI1b Explain the role of money and how it
facilitates exchange.