Circular flow diagram

Standard 5 Individuals, businesses and governments interact and exchange goods, services and resources in different ways and for different reasons; interactions between buyers and sellers in a market determines the price and quantity exchanged of a good, service, or resource.

Benchmark - 9.2.4.5.1 - Describe the role households, businesses and governments in the movement of resources, goods and services, and money in an economy.                         

                                              The Circular Flow Model:

                              

This diagram is a schematic representation of the organization of the economy. Decisions are made by households and firms. Households and firms interact in the market for goods and services (where households are buyers and firms are sellers) and in the markets for the factors of production (where firms are buyers and households are sellers). The outer set of arrows shows the flow of dollars, and the inner set of arrows shows the corresponding flow of goods and services.

Market for Goods and Services:
 Firms sell, households buy.

Markets for Factors of Production:

  •   Households sell, firms buy.

    Firms:

  •   Produce and sell goods and services, hire and use factors of production.

    Households:

  •   Buy and consume goods and services, own and sell factors of production. 

                      

      Here is a clip from freeeconhelp.com ( a very good site to visit) that will help you understand the role of households, businesses and governments in the movement of resources, goods and services, and money in the economy.

               "http://www.youtube.com/embed/s4wCG4AVJ-8?feature=player_detailpage"

 

Questions for Submission:

1.  What are the two functions of firms in the economy?

2.  What are the two functions of households in the economy?

3.  Good and services only flow around the economy in one direction; money flows in the        _______(fill in)_____________   direction.

4.  What three broad categories are factors of production lumped into?

5.  What are the names for the prices of labor, land and capital ?

6.  In markets for factors of production, households __(fill in)___ the services of labor, land and capital in exchange for wages, rent and profits.