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The Circular Flow of Economic Activity

The circular flow of economic activity describes how money, goods, and services are continuously exchanged between economic agents in the economy. It illustrates the interdependence between households and firms, where households supply factors of production like labor, capital, and resources to firms and receive income, and firms produce goods and services and receive revenue from household expenditures. This continuous exchange creates a self-sustaining cycle that forms the basis of a healthy market economy. The government also plays a role in providing stability, infrastructure, and certain goods and services to support the circular flow.

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April Joy Delacruz
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34 views17 pages

The Circular Flow of Economic Activity

The circular flow of economic activity describes how money, goods, and services are continuously exchanged between economic agents in the economy. It illustrates the interdependence between households and firms, where households supply factors of production like labor, capital, and resources to firms and receive income, and firms produce goods and services and receive revenue from household expenditures. This continuous exchange creates a self-sustaining cycle that forms the basis of a healthy market economy. The government also plays a role in providing stability, infrastructure, and certain goods and services to support the circular flow.

Uploaded by

April Joy Delacruz
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PPT, PDF, TXT or read online on Scribd
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The Circular Flow of

Economic Activity
The Circular Flow
► Our economy is an enormous, constant
cycle, with money, products, and energy
flowing back and forth
► Economists refer to this as the Circular Flow
of Economic Activity
► Economic Interdependence
 Businesses, households, and the government
depend on each other in order for the economy
to run smoothly.
Households
are where you find
regular people who
work and consume in
our economy
Households Firms
are the businesses that
produce, employ us,
and purchase in our
economy
Factor
Market

The factor market


is where the four
factors of
production are
bought and sold.

Households Firms
The Factor Market
Four Factors Factor
Market

Households
contribute their
land, labor, skills,
and capital to the
factor marker.

Households Firms
Four Factors Factor Four Factors

Market

Those things are


put to use in firms.

Households Firms
The Product Market
Four Factors Factor Four Factors

Market

The product
market is where
firms sell their
goods and
services and
people buy them.
Households Firms

Product
Market
Four Factors Factor Four Factors

Market

Firms send those


goods and
services into the
Households market.
Firms

Product
Market Goods and Services To Be Sold
Four Factors Factor Four Factors

Market

The goods and


services go back
into households.
Households Firms

Product
Purchased Goods and Services Market Goods and Services To Be Sold
Four Factors Factor Four Factors

Market Wages and Salaries

Meanwhile, firms
put money back
into the factor
market in the form
Households of wages and Firms
salaries.

Product
Purchased Goods and Services Market Goods and Services To Be Sold
Four Factors Factor Four Factors

Income
Market Wages and Salaries

This money is the


income
households earn.

Households Firms

Product
Purchased Goods and Services Market Goods and Services To Be Sold
Four Factors Factor Four Factors

Income
Market Wages and Salaries

Households spend
this money on
goods and
services

Households Firms

Expenditures
Product
Purchased Goods and Services Market Goods and Services To Be Sold
Four Factors Factor Four Factors

Income
Market Wages and Salaries

And businesses
earn revenue.

Households Firms

Expenditures Revenue
Product
Purchased Goods and Services Market Goods and Services To Be Sold
Four Factors Factor Four Factors

Income
Market Wages and Salaries

Households Firms

Expenditures Revenue
Product
Purchased Goods and Services Market Goods and Services To Be Sold
A Simplified Version
RESOURCES

WAGES AND SALARIES

Households Businesses

EXPENDITURES

FINISHED GOODS
THE ROLE OF GOVERNMENT
► the government, meanwhile, provides law and order,
stability and structure to allow our economy to prosper
► furthermore, the government also provides goods and
services that might no otherwise be provided by market
demands……..
► national defense
► maintaining national and public parks and monuments

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