Circular Flow Diagram

Circular Flow Diagram Created by D. Miller dimiller@nmu.edu

Circular Flow Diagram The circular flow diagram is in the shape of a circle because all of the components work together and without one, it would not function.

Producers/Businesses • The producer is responsible for making, or producing, the products and providing the services. • The producer requires resources from the resource market to make the output. • The producer then supplies their output to the product market.

What if the Producers/Businesses component was removed from the diagram? • There would be no one to make goods or provide services. • Consumers would need to provide for themselves (this means growing their own food, making their own cars, etc.) • Consumers would not need to provide their labor to producers, and, in turn, would not receive an income.

Product Market • The product market is where the output, or goods and services made by producers, are sold. • Goods are tangible items, which means they can be held. • Services are intangible items, which means they cannot be held. • This market allows consumers to easily find the goods and services they need without having to search for someone who produces or provides them.

What if the product market was removed from the diagram? • There would be no one to connect the producer and the consumer. • Consumers and producers would need to find each other in order to make a sale. This can be very hard if they live many, many miles away!

Consumers/Households • The consumer buys, or “consumes”, the goods and services from the product market. • The consumer offers their labor resource to the resource market. • In return for their labor, consumers receive income which helps them pay for their consumption of goods and services.

What if the Consumers/Households component was removed from the diagram? • This would be worse than if there were no producer, because there would be no one to benefit from the goods and services the producer provides. • There would be no one giving the labor resource to the resource market.

Resource Market • The resource market is where the resources needed by producers are brought together. • The resources in this market are: land, labor, capital, and entrepreneurial talent. • This market allows producers to easily find the resources they need.

Types of Resources • Land: the piece of property where the buildings and landforms will be placed. • Labor: the physical work that is needed to make the products or provide the services. • Capital: the machines that is used to produce the products. • Entrepreneurial Talent: the bright ideas that people contribute to making or improving the goods and services.

What if the resource market were removed from the diagram? • There would be no one to connect the producer to the resources needed to make the goods or provide the services. • Producers would need to find the resources they needed, which is harder than being able to find them in one place.

Circular Flow Diagram Internal Resources • Circular Flow Diagram Home Page • Circular Flow Diagram Worksheet • Circular Flow Diagram Worksheet Answers • Circular Flow Diagram Test • Circular Flow Diagram Test Answers

Circular Flow Diagram On-Line Resources • http://www.econedlink.org • Economic Skills for Elementary Students • http://go.hrw.com/secure/ss/general/utpdf/zvch21S1.pdf • Lesson Main Page • http://ecedweb.unomaha.edu/K-12/home.cfm

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Circular Flow Diagram