The+Circular+Flow+Model

=Circular Flow Model=

The Circular Flow Model represents the flow of consumer goods and capital goods in an economy. Households provide/sell factors of production such as land,capital, labour and entrepreneurial ability to the Factor Market which distributes these same goods to the [|Buisnesses]. In return for supplying these factors, Buisnesses pay the costs of these resources back into the Factor Market which then goes back to the Households. These costs take the form of wages, rents, interest or profits. On the other end Buisnesses use these resources to provide finished goods or services that go into the [|Product Market]. These products are then sold to households who in return pay for the goods, producing revenue for the buisnesses back through the Product market.

The Circular Flow Model is a very effective way in expressing the idea of how inner-dependant the economy is on both the buying and selling of goods. For example, the money that is payed out by the companies is the same money that buys the finished products from the companies. Each Market and establishment cannot exist on its own because they all input and output from one another.

Overall, this is important twofold. First because we all have the decision of choice in what is bought and produced and secondly because this freedom of choice ensures that the econmoy is allocatively efficient for both consumers and producers.

Extra: [|New York Stock Exchange Link!]



Study Question Households Provide which "good" to the Product Market? a.) Costs b.) Consumption Expenditures c.) Finished Goods and Services d.) Rent e.) Factors of Production

Circular Flow Explained!
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Answer: B