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The Circular Flow Model

Learn the Circular Flow Model illustrating economic systems and the Law of Demand explaining consumer behavior. Identify market structures, factors affecting demand, and demand determinants.

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The Circular Flow Model

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  1. The Circular Flow Model Supply and Demand

  2. I) The Circular Flow Model • A) This is a chart that shows how economic systems work and how firms and people fit into these economic systems

  3. I) The Circular Flow Model • B) There are 4 parts to this model

  4. I) The Circular Flow Model • B) There are 4 parts to this model • 1) Product market- where the consumer sales take place

  5. I) The Circular Flow Model • B) There are 4 parts to this model • 1) Product market- where the consumer sales take place • 2) Factor market- where the sales of the factors of production take place

  6. I) The Circular Flow Model • B) There are 4 parts to this model • 1) Product market- where the consumer sales take place • 2) Factor market- where the sales of the factors of production take place • 3) Firms

  7. I) The Circular Flow Model • B) There are 4 parts to this model • 1) Product market- where the consumer sales take place • 2) Factor market- where the sales of the factors of production take place • 3) Firms

  8. I) The Circular Flow Model • B) There are 4 parts to this model • 1) Product market- where the consumer sales take place • 2) Factor market- where the sales of the factors of production take place • 3) Firms • 4) Households

  9. Circular Flow Model Product Market FINISHED GOODS PRODUCT PURCHASE Firms Households UNFINISED GOODS Factor Market LABOR

  10. Circular Flow Model Product Market $ $ Firms Households $ $ Factor Market

  11. II) The Law of Demand • A) Demand- the willingness to buy a product at a particular price

  12. II) The Law of Demand • A) Demand- the willingness to buy a product at a particular price • 1) Demand only occurs when a product is actually being sold

  13. II) The Law of Demand • A) Demand- the willingness to buy a product at a particular price • 1) Demand only occurs when a product is actually being sold • 2) The desire to have something is not demand

  14. II) The Law of Demand • A) Demand- the willingness to buy a product at a particular price • 1) Demand only occurs when a product is actually being sold • 2) The desire to have something is not demand • Ex. Are you willing to buy a cd if it was $100.00?

  15. II) The Law of Demand • B) law of demand- people will buy more of a product at a lower price than they will at a higher price

  16. II) The Law of Demand • B) law of demand- people will buy more of a product at a lower price than they will at a higher price • 1)  ex. Would you buy more cd’s if they were only $1.00?

  17. II) The Law of Demand • B) law of demand- people will buy more of a product at a lower price than they will at a higher price • 1)  ex. Would you buy more cd’s if they were only $1.00?

  18. II) The Law of Demand • C) Demand can be shown in a table, known as a demand schedule Price # Sold $70 10 $60 20 $50 30 $40 40 $30 50

  19. II) The Law of Demand • D) From this table you can construct a graph know as a demand curve

  20. II) The Law of Demand • E) Factors that change demand are known as determinants of demand

  21. II) The Law of Demand • E) Factors that change demand are known as determinants of demand • 1) Tastes

  22. II) The Law of Demand • E) Factors that change demand are known as determinants of demand • 1) Tastes • 2) Income: more money=more purchases=higher demand

  23. II) The Law of Demand • 3) Price of Related Products: if another product can be used in place of another, then people will substitute (substitute goods)

  24. II) The Law of Demand • 3) Price of Related Products: if another product can be used in place of another, then people will substitute (substitute goods) • a) ex. Price of hotdogs drops, while hamburgers stay the same, more hotdogs will be purchased

  25. II) The Law of Demand • 3) Price of Related Products: if another product can be used in place of another, then people will substitute (substitute goods) • a) ex. Price of hotdogs drops, while hamburgers stay the same, more hotdogs will be purchased • b) complimentary goods are used with each other

  26. II) The Law of Demand • 3) Price of Related Products: if another product can be used in place of another, then people will substitute (substitute goods) • a) ex. Price of hotdogs drops, while hamburgers stay the same, more hotdogs will be purchased • b) complimentary goods are used with each other • 1. Ex. Gasoline and cars, if gas prices go up, car sales decrease

  27. II) Law of Demand • 4) Number of potential customers: are there too many purchasers or not enough?

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