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Circular Flow of Economic Activity

Circular Flow of Economic Activity. Georgia Standard. SSEMI1 The student will describe how households, businesses, and governments are interdependent and interact through flows of goods, services, and money.

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Circular Flow of Economic Activity

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  1. Circular Flow of Economic Activity

  2. Georgia Standard SSEMI1 The student will describe how households, businesses, and governments are interdependent and interact through flows of goods, services, and money. a. Illustrate by means of a circular flow diagram, the Product market; the Resource (factor) market; the real flow of goods and services between and among businesses, households, and government, and the flow of money. b. Explain the role of money as a medium of exchange and how it facilitates exchange.

  3. Microeconomics • Study of decision-making of individuals & small businesses. • Imagine economy being placed under microscope and zooming in on individuals & small businesses.

  4. How will study of economics help me? • Help me to be a better voter. • Help me to be a better consumer. • Help you make informed decisions and no fall for “scare” tactics of the media. • Help you graduate from high school!

  5. Circular Flow Model demonstrates flow of goods/services & money in an economy in a simplified way.

  6. Circular Flow of Economic Activity Product Market (Goods & Services) Goods & Services Goods & Services $$$$$$$$ $$$$$$ These are transactions that would take place in the Product Market: Sue purchasing a sweater. Chris buying a video game. Tom buying a hamburger. Dawn having her hair cut. Cindy getting her nails done. Lupe’ buying groceries. Households/Individuals Businesses/Firms

  7. Circular Flow of Economic Activity Product Market (Goods & Services) Goods & Services Goods & Services $$$$$$$$ $$$$$$ Households/Individuals Businesses/Firms If this were all of the model, the money would all end up with firms & products all with households. Money paid by households to firms in payment for the goods & services is called product price.

  8. Circular Flow of Economic Activity Product Market (Goods & Services) Goods & Services Goods & Services $$$$$$$$ $$$$$$ Productive Resource traded in Factor Market: Labor -- Individuals provide the labor for the businesses/firms in the Factor/Resource market by working for them and are paid wages for their work. Households/Individuals Businesses/Firms Factor/Resource Market (Factors of Production) FOP Factors of Production

  9. Circular Flow of Economic Activity Product Market (Goods & Services) Goods & Services Goods & Services $$$$$$$$ $$$$$$ Productive Resource traded in the Factor Market: Land -- Individuals own land & allow businesses/firms to use land in the Factor/Resource market and are paid rent for use of individuals’ land. Households/Individuals Businesses/Firms Factor/Resource Market (Factors of Production) FOP Factors of Production

  10. Circular Flow of Economic Activity Product Market (Goods & Services) Goods & Services Goods & Services $$$$$$$$ $$$$$$ Productive Resource traded in the Factor Market: Capital – Households/Individuals invest their financial capital (money) in businesses/firms. Businesses use that invested money to acquire capital. Paym. for use of individuals’ financial capital is interest. *** Note – Financial Capital is not a productive resource! Households/Individuals Businesses/Firms Factor/Resource Market (Factors of Production) FOP Factors of Production

  11. Circular Flow of Economic Activity Product Market (Goods & Services) Goods & Services Goods & Services $$$$$$$$ $$$$$$ Note: Money flows in one direction, while Goods/Services & FOP flow in the opposite direction. Households/Individuals Businesses/Firms Factor/Resource Market (Factors of Production) FOP Factors of Production

  12. Examples of transactions in Factor Market • Mrs. Squires teaching classes at Brooks Co. Schools. • Sanford cooking burgers at Hardees. • Natasha working at Belk’s as a cashier. • Steel’s Sales renting a lot from Mr. Tomaz. • Mr. Smith investing financial capital in Verizon Wireless.

  13. Circular Flow of Economic Activity Product Market (Goods & Services) Goods & Services Goods & Services $$$$$$$$ $$$$$$ Households/Individuals Businesses/Firms Factor/Resource Market (Factors of Production) FOP Factors of Production

  14. The standard says illustrate. . . • the Product market; • the Resource (factor) market; • the real flow of goods and services between and among businesses, households, and government; • the flow of money.

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