CIRCULAR FLOW

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• CIRCULAR FLOW

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FREE MARKET ECONOMY
Households
Firms
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2 Major Players
Households
Firms
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Households
Firms
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HOUSEHOLDS

• You
• Owners of the factors of production
• Consumers
• Consumption

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Household/ Consumers
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Households
Firms
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FIRMS

• businesses
• use resources to produce products (production),
  then sells them

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• INPUTS FACTORS OF PRODUCTION

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• OUTPUTS PRODUCTS

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2 Major Markets
Product Market
Factor Market
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Product Market
Households
Firms
Factor Market
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Product Market
Households
Firms
Factor Market
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• WHAT IS BOUGHT SOLD IN THE FACTOR MARKET?

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• THE FACTORS OF PRODUCTION

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• WHO SELLS THE FACTORS OF PRODUCTION IN THE FACTOR
  MARKET?

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• HOUSEHOLDS

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• Households sellers in the factor market

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They sell the factors of production in return for
Factor Payments
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INCOME
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Land - Rent
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Labor - Wages
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Capital - Interest
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Entrepreneurial Ability Profit
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• WHO BUYS THE FACTORS OF PRODUCTION IN THE FACTOR
  MARKET?

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• FIRMS

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Product Market
Households
Firms
Factor Market
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• WHAT IS BOUGHT SOLD IN THE PRODUCT MARKET?

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• PRODUCTS

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• WHO SELLS PRODUCTS IN THE PRODUCT MARKET?

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• FIRMS

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• WHO BUYS PRODUCTS IN THE PRODUCT MARKET?

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• HOUSEHOLDS

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• Where did the households get money to purchase
  products from?

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• THE FACTOR MARKET

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Product Market
Households
Firms
Factor Market
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• The inner ring represents the flow of resources
  products (physical flow)

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Resources
Goods Services

• What is Physical?

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INPUTS SUPPLIED
Physical Flow
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INPUTS DEMANDED
Physical Flow
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Physical Flow
GOODS SUPPLIED
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Physical Flow
GOODS DEMANDED
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Physical Flow
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• The outer ring represents the flow of money
  (monetary flow)

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Monetary Flow
EXPENDITURE
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Monetary Flow
REVENUE
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COSTS
Monetary Flow
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INCOME
Monetary Flow
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Monetary Flow
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The Circular Flow Model