Friday, April 4, 2008

The Circular Flow Diagram



Economic Model #1: The Circular-Flow Diagram

One model that helps explain how a market economy works is a circular-flow diagram. A circular-flow diagram is a visual model of the economy that illustrates how households and businesses interact through markets for products and markets for resources. A simple circular-flow diagram is illustrated in Figure 1.

The two types of economic agents in a simple market economy are households and business firms. A household is a social unit comprised of those living together in the same dwelling. A business or business firm is a company that produces goods or services, usually in an effort to make a profit. Profit is revenues minus expenses. Revenues are the monetary income received by a business in exchange for goods or services. Expenses are the total costs of the production of goods or services by a business.

Households interact with business firms it two distinct ways:
(1) households supply economic resources, such as labor, to businesses in exchange for income, and (2) households use their incomes to buy goods and services produced and sold by business firms. The first type of interaction occurs in markets for resources. The second type of interaction occurs in markets for products.

The top half of the circular-flow diagram, which represents product markets, shows that households give money to businesses in exchange for goods and services. Money flows counterclockwise, while the goods and services flow clockwise. In markets for products, businesses usually are the suppliers and households usually are the demanders. The money that flows from households to business firms is consumption spending from the perspective of households and is revenue from the perspective of business firms. The products that flow from business firms to households are sales by the business firms and purchases by household consumers.

The bottom half of the circular-flow diagram, which represents resource markets, shows that businesses give money to households in exchange for economic resources used as factors of production. For example, when people work for a business, they are supplying their labor as a factor of production. In exchange for their labor, households are paid wages and salaries by businesses. This is illustrated by the counterclockwise flow of money and the clockwise flow of economic resources. In markets for economic resources, households usually are the suppliers and businesses usually are the demanders. The monies that flow from business firms to households are expenditures from the perspective of business firms and incomes from the perspective of households. The labor, capital, and natural resources that flow from households to business firms are sources of income from the perspective of households and inputs from the perspective of businesses. Inputs are also called factors of production because they are used by businesses to produce goods and services.

Labor is an economic resource that every household adult can potentially supply in the markets for resources. Wages are the payments made to workers in exchange for labor, typically based upon the amount of time worked or amount of output produced. A salary is a fixed payment made regularly to a worker in exchange for labor. Blue-collar workers typically receive wages. White-collar workers are typically paid salaries.

When workers receive more income than they spend on the purchases of goods and services, they are able to create savings. Savings are the portion of a person’s income that is retained or invested for use in the future. Household savings can become financial capital if the money is borrowed by a business firm. For example, money that is deposited by households in a bank savings account might be loaned by the bank to a business that needs to borrow funds to build a new factory or purchase new equipment. When this occurs, the business firm pays interest to the bank for the borrowed funds. Interest is a rate of return that represents compensation from the borrower or receiver of funds to the lender or depositor of the funds. The bank, in turn, pays interest to the householders for the funds deposited in the savings accounts. Consequently, other transactions that occur in resource markets are the supply of financial capital by households in exchange for interest income.

If households own natural resources, such as land, they can supply them to businesses in exchange for rent payments.

In the next module (Supply & Demand Analysis), it is important to remember the relationships between households and business firms that are illustrated in a circular flow diagram. In product markets, business firms supply and sell goods and services while households demand and buy them. In resource markets, the relationship is reversed. Households supply and sell factors of production, such as labor, while business firms demand and buy them.

74 comments:

  1. Whats it called in the circular flow model where people and businesses exchange resources for payment?

    ReplyDelete
  2. I think you mean the money flows clockwise and the goods and services flow counterclockwise.

    ReplyDelete
    Replies
    1. yeah! you're right! He might have overlooked it.

      Delete
  3. Will be using your figure in my Mgt Economic report.

    I am supposed to make a circular flow diagram for a leasing firm (SME industry). Now i am bit confused on how to do that, as they are giving money to household and businesses...

    ReplyDelete
  4. It's magnificent I had no idea about this until I read this entry of yours over here. And I have a question for you. Do you happen to know how to protect your personal reflections from being stolen without notifying you about it?

    ReplyDelete
  5. it helped me a lot :) thumbs up.. by the way... thanks ..

    ReplyDelete
  6. Thanks i was "blind, but now i can see!"

    ReplyDelete
  7. Could u plz give the definition of a simplified economy

    ReplyDelete
  8. two types of economic agents in a simple market economy are households and business firms. A household is a social unit comprised of those living together in the same dwelling. guaranteed money help A business or business firm is a company that produces goods or services, usually in an effort to make a profit.

    ReplyDelete
  9. very helpful for my work. Thanks ......

    ReplyDelete
  10. This comment has been removed by the author.

    ReplyDelete
  11. Nice blog and very helpful to understand market position.
    Thank you for sharing us.
    Gold Tips

    ReplyDelete
  12. You can represent this better in a flow diagram or in a flowchart. Use a diagramming tool like creately then you are good to go!

    ReplyDelete
  13. Nice Website...
    Hey JOIN now fblikesbot.com and Increase Facebook Likes your profile and websites.
    Increase Facebook Likes and check your website worth worth my websites
    its may be very beneficial for you also really

    ReplyDelete
  14. your market news was awesome, i suggest you don't stop giving you news, ideas and everything, keep it up, get more profit in share market sign up now :-www.capvision.co.in click here:- Stock Tips

    ReplyDelete
  15. In the resource market what is the household

    ReplyDelete
  16. In the resource market what is the household

    ReplyDelete
  17. I am a big believer in placing comments on blogs and forums to inform the blog writers know that they have added something useful to the world wide web! franchise Toronto

    ReplyDelete
  18. Thanks for sharing this great article! That is very interesting I love reading and I am always searching for informative information like this.
    sell products and services

    ReplyDelete
  19. This comment has been removed by the author.

    ReplyDelete
  20. This is a valuable topic indeed. I would like thanks if you clarify me more about Taxes Today

    ReplyDelete
  21. This is a valuable topic indeed. I would like thanks if you clarify me more about Taxes Today

    ReplyDelete
  22. This is a valuable topic indeed. I would like thanks if you clarify me more about Taxes Today

    ReplyDelete
  23. This is a valuable topic indeed. I would like thanks if you clarify me more about Taxes Today

    ReplyDelete
  24. This is a valuable topic indeed. I would like thanks if you clarify me more about Taxes Today

    ReplyDelete

  25. Is it time to sell your california land? We make selling your land a quick and easy process, and it costs you nothing out of pocket. For more information then Visit: www.purelandbuyers.com

    Sell land fast
    i want to sell my land
    Selling your land

    ReplyDelete
  26. I have a question. Why Households will give goods and services to the business firms??

    ReplyDelete
  27. Thanks, You wrote awesome, I knew lots of things from your article. Its really helpful for any readers.
    Battery Operated Flow Meter

    ReplyDelete
  28. material handling equipments | Automated Storage & Retrieval System | Conveyors | Automated Guided Vehicles | Warehouse Management System | SCADA Supervision Software!

    ReplyDelete
  29. I must say very informative points you shared for trader, I like the way you tied all the information. Looking forward for
    Free Intraday Tips

    ReplyDelete
  30. Very Nice article ..... For more Detail about market economy join Prime institute

    ReplyDelete
  31. Hi admin, it is very nice blog, very informative blog so thank you so much for this information. But there is another website with same concept of free ad posting www.helpadya.com www.helpadya.com Classified Free Ads.

    ReplyDelete
  32. there have really most essential helps explain how a market economy works is a circular-flow diagram.. thanks for share with us.





    Pay less tax in the UK | UK Dentists pay less tax




    ReplyDelete


  33. نقدم لكم افضل الديكورات واحدث المنتجات في عالم الجوده والخيال
    شركة دهانات بجازان
    تتعدد مجالات شركتنا فيهذا المجال لذلك نقدم
    شركة مقاولات بجازان
    j

    ReplyDelete
  34. I have read your blog,its very useful ,Thank you very much.
    Free Commodity Tips

    ReplyDelete
  35. Nice blog..! I really loved reading through this article... Thanks for sharing such an amazing post with us and keep blogging...
    farm accounting and management services

    ReplyDelete
  36. Thank you for your post. This is excellent information. It is amazing and wonderful to visit your site.
    agricultural farms service providers

    ReplyDelete
  37. They can make it about as hard to compare apples to apples as training a ferret on Red Bull. best movers cross country

    ReplyDelete
  38. Awesome,
    Thank you so much for sharing such an awesome blog...
    farm accounting software solutions

    ReplyDelete
  39. Who is the author of the Circular Flow Diagram?

    ReplyDelete
  40. Useful Information, your blog is sharing unique information....
    Thanks for sharing!!!
    online commodity trading
    hectare value management systems

    ReplyDelete
  41. People who were making exactly $0/month were now beginning to see REAL profit from their business...

    Why?

    Because they were at the right place, at the right time, in the right mindset.

    And everybody who ignored the plugin... well, they just kept on making that $0/month...

    Now, the reason that I am teaching you this today is because InstaBuilder is opening its doors again!

    After two years of development, tweaking, and testing with their 6000+ customer base, the owners of InstaBuilder have decided to "go public"...

    For the first time EVER you can get access to the NEW AND IMPROVED version of the plugin that completely transformed the sales funnel creation industry...

    Check It Out Here >>> http://instabuilder.com?kdjf984798

    Now, here is your chance to be in the right place, at the right time, in the right mindset.

    ReplyDelete
  42. Thank you for taking the time to provide us with your valuable information. We strive to provide our candidates with excellent care and we take your comments to heart.As always, we appreciate your confidence and trust in us
    Billing Software in chennai

    ReplyDelete
  43. Are you tired of seeking loans and Mortgages,have you been turned down constantly By your banks and other financial institutions,We offer any form of loan to individuals and corporate bodies at low interest rate.If you are interested in taking a loan,feel free to contact us today,we promise to offer you the best services ever.Just give us a try,because a trial will convince you.What are your Financial needs?Do you need a business loan?Do you need a personal loan?Do you want to buy a car?Do you want to refinance?Do you need a mortgage loan?Do you need a huge capital to start off your business proposal or expansion? Have you lost hope and you think there is no way out, and your financial burdens still persists? Contact us (gaincreditloan1@gmail.com)

    Your Name:...............
    Your Country:...............
    Your Occupation:...............
    Loan Amount Needed:...............
    Loan Duration...............
    Monthly Income:...............
    Your Telephone Number:.....................
    Business Plan/Use Of Your Loan:...............
    Contact Us At : gaincreditloan1@gmail.com

    ReplyDelete

  44. People who were making exactly $0/month were now beginning to see REAL profit from their business...

    Why?

    Because they were at the right place, at the right time, in the right mindset.

    And everybody who ignored the plugin... well, they just kept on making that $0/month...

    Now, the reason that I am teaching you this today is because InstaBuilder is opening its doors again!

    After two years of development, tweaking, and testing with their 6000+ customer base, the owners of InstaBuilder have decided to "go public"...

    For the first time EVER you can get access to the NEW AND IMPROVED version of the plugin that completely transformed the sales funnel creation industry...

    Check It Out Here >>> http://instabuilder.com?kdfsh7405

    ReplyDelete
  45. People who were making exactly $0/month were now beginning to see REAL profit from their business...

    Why?

    Because they were at the right place, at the right time, in the right mindset.

    And everybody who ignored the plugin... well, they just kept on making that $0/month...

    Now, the reason that I am teaching you this today is because InstaBuilder is opening its doors again!

    After two years of development, tweaking, and testing with their 6000+ customer base, the owners of InstaBuilder have decided to "go public"...

    For the first time EVER you can get access to the NEW AND IMPROVED version of the plugin that completely transformed the sales funnel creation industry...

    Check It Out Here >>> http://instabuilder.com?kdfsh7405

    Now, here is your chance to be in the right place, at the right time, in the right mindset.

    ReplyDelete
  46. Useful Information, your blog is sharing unique information....
    Thanks for sharing!!!
    freeze protection methods for crops
    aggregate farming software providers

    ReplyDelete
  47. i have recently applied for loan of$5000 i got approval instantly at Business loans online , i advice you to visit once This is just superb, I have been researching "how to get a business with bad credit" for a while now, and I think this has helped you.

    ReplyDelete
  48. This comment has been removed by the author.

    ReplyDelete
  49. People who were making exactly $0/month were now beginning to see REAL profit from their business...

    Why?

    Because they were at the right place, at the right time, in the right mindset.

    And everybody who ignored the plugin... well, they just kept on making that $0/month...

    Now, the reason that I am teaching you this today is because InstaBuilder is opening its doors again!

    After two years of development, tweaking, and testing with their 6000+ customer base, the owners of InstaBuilder have decided to "go public"...

    For the first time EVER you can get access to the NEW AND IMPROVED version of the plugin that completely transformed the sales funnel creation industry...

    Check It Out Here >>> http://instabuilder.com?nc8w65682g

    Now, here is your chance to be in the right place, at the right time, in the right mindset.

    ReplyDelete
  50. My Brothers and Sister all over the world, I am Mrs Boo Wheat from Canada ; i was in need of loan some month ago. i needed a loan to open my restaurant and bar, when one of my long time business partner introduce me to this good and trustful loan lender DR PURVA PIUS that help me out with a loan, and is interest rate is very low , thank God today. I am now a successful business woman, and I became useful. In the life of others, I now hold a restaurant and bar. And about 30 workers, thank GOD for my life I am leaving well today a happy father with three kids, thanks to you DR PURVA PIUS Now I can take care of my lovely family, i can now pay my bill. I am now the bread winner of my family. If you are look for a trustful and reliable loan leader. You can Email him via,mail (urgentloan22@gmail.com) Please tell him Mrs Boo Wheat from Canada introduce you to him. THANKS

    ReplyDelete

  51. Useful Information, your blog is sharing unique information....
    Thanks for sharing!!!
    How Exchange Rates Affect Agricultural Markets
    farm accounting services

    ReplyDelete
  52. After being in relationship with him for seven years,he broke up with me, I did everything possible to bring him back but all was in vain, I wanted him back so much because of the love I have for him, I begged him with everything, I made promises but he refused. I explained my problem to someone online and she suggested that I should rather contact a spell caster that could help me cast a spell to bring him back but I am the type that never believed in spell, I had no choice than to try it, I mailed the spell caster, and he told me there was no problem that everything will be okay before three days, that my ex will return to me before three days, he cast the spell and surprisingly in the second day, it was around 4pm. My ex called me, I was so surprised, I answered the call and all he said was that he was so sorry for everything that happened, that he wanted me to return to him, that he loves me so much. I was so happy and went to him, that was how we started living together happily again. Since then, I have made promise that anybody I know that have a relationship problem, I would be of help to such person by referring him or her to the only real and powerful spell caster who helped me with my own problem and who is different from all the fake ones out there. Anybody could need the help of the spell caster, his email: drosedebamenspellhome@gmail.com you can email him if you need his assistance in your relationship or anything. CAN NEVER STOP TALKING ABOUT YOU SIR HIS EMAIL ADDRESS IS:drosedebamenspellhome@gmail.com CONTACT HIM NOW FOR SOLUTION TO ALL YOUR PROBLEM

    ReplyDelete
  53. This trading means a various aspects in stock market also which is wholly depend on this.


    Stock Cash Tips
    NCDEX Trading Tips

    ReplyDelete
  54. Useful Information, your blog is sharing unique information....
    Thanks for sharing!!!
    freeze protection methods for crops
    agricultural farming providers

    ReplyDelete
  55. Useful Information, your blog is sharing unique information....
    Thanks for sharing!!!
    How Exchange Rates Affect Agricultural Markets
    food safety management system

    ReplyDelete
  56. People who were making exactly $0/month were now beginning to see REAL profit from their business...

    Why?

    Because they were at the right place, at the right time, in the right mindset.

    And everybody who ignored the plugin... well, they just kept on making that $0/month...

    Now, the reason that I am teaching you this today is because InstaBuilder is opening its doors again!

    After two years of development, tweaking, and testing with their 6000+ customer base, the owners of InstaBuilder have decided to "go public"...

    For the first time EVER you can get access to the NEW AND IMPROVED version of the plugin that completely transformed the sales funnel creation industry...

    Check It Out Here >>> http://instabuilder.com?nc8w65682g

    Now, here is your chance to be in the right place, at the right time, in the right mindset.

    ReplyDelete
  57. Why?

    Because they were at the right place, at the right time, in the right mindset.

    And everybody who ignored the plugin... well, they just kept on making that $0/month...

    Now, the reason that I am teaching you this today is because InstaBuilder is opening its doors again!

    After two years of development, tweaking, and testing with their 6000+ customer base, the owners of InstaBuilder have decided to "go public"...

    For the first time EVER you can get access to the NEW AND IMPROVED version of the plugin that completely transformed the sales funnel creation industry...

    Check It Out Here >>> http://instabuilder.com? Vhbshygdf398432

    Now, here is your chance to be in the right place, at the right time, in the right mindset.

    ReplyDelete
  58. Thank you for your post. This is excellent information. It is amazing and wonderful to visit your site.

    moving companies in florida

    ReplyDelete
  59. Hey I don't have words to describe this post. I simply want to say that absolutely informative post. It inspires me a lot. Keep posting.
    Aircraft Warning Lights | Aviation warning lighting - CEL

    ReplyDelete
  60. People who were making exactly $0/month were now beginning to see REAL profit from their business...

    Why?

    Because they were at the right place, at the right time, in the right mindset.

    And everybody who ignored the plugin... well, they just kept on making that $0/month...

    Now, the reason that I am teaching you this today is because InstaBuilder is opening its doors again!

    After two years of development, tweaking, and testing with their 6000+ customer base, the owners of InstaBuilder have decided to "go public"...

    For the first time EVER you can get access to the NEW AND IMPROVED version of the plugin that completely transformed the sales funnel creation industry...

    Check It Out Here >>> http://instabuilder.com?nc8w65682g

    Now, here is your chance to be in the right place, at the right time, in the right mindset.

    ReplyDelete
  61. I just would like to give you a big thumbs up for the great information you share on this post.
    Accounting Software Services in Pakistan
    Taxation Services in Pakistan
    Human Resource Services in Pakistan

    ReplyDelete
  62. Thanks for sharing information with us, Keep on sharing the blog like this.
    VAT Registration in UAE
    VAT Audits in UAE
    Business Consultants in UAE

    ReplyDelete
  63. Movers in FloridaMovers in miami - Moving companies in Florida, best services Free Moving Companies Quotes Compare Save on Movers Cost, Contact us now!

    ReplyDelete
  64. Nice, I have seen your post and it was very nice. The two types of agents theory is fantastic. Keep doing the best. To visit my blog please CLICK HERE

    ReplyDelete