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.

241 comments:

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

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  2. 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...

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

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

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  6. Could u plz give the definition of a simplified economy

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  7. 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.

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  8. very helpful for my work. Thanks ......

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  10. yeah! you're right! He might have overlooked it.

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  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!

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  14. In the resource market what is the household

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  15. In the resource market what is the household

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  71. How I got My Loan From A God sent And Genuine Loan Lender…

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  75. I am writing this Testimony because am really grateful for what Mr Houston did for me and my family, when I thought there was no hope he came and make my family feel alive again by lending us loan at a very low interest rate of 3%. Well I have been searching for a loan to settle my debts for the past three months all I met scammed and took my money until I finally met a God sent Lender. I never thought that there are still genuine loan lenders on the internet but to my greatest surprise i got my loan without wasting much time so if you are out there looking for a loan of any amount i would advise you to contact Mr Houston via email Houstonloanfirm@yahoo.com Once again thank you Mr Houston am really grateful

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  76. PERFECT LOTTERY SPELL THAT WORK FAST WITHIN 22 HOURS WITH DR WINNER LOTTERY SPELL POWERS

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  78. Replies
    1. Hello Everyone out there! I'm Alexanda hook, from Usa I am using this medium to announce to the general public on how Houston Loan Firm Company restored happiness to my home again, through the help of Mr Houston, When all hope was lost they granted me a loan sum of $50,000 on the 7th of February 2019 to settle my debts and start up a business of my own. They saved me and my family from loosing our home as we were not able to pay tax bills. I am writing this message cause I feel it might be important for you out there seriously in need of a genuine loan in other for you not to fall into the wrong hands in search of a liable loan,I strongly advice you to contact this company via email: Houstonloanfirm@yahoo.com

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  79. Hello Everyone out there! I'm Alexanda hook, from Usa I am using this medium to announce to the general public on how Houston Loan Firm Company restored happiness to my home again, through the help of Mr Houston, When all hope was lost they granted me a loan sum of $50,000 on the 7th of February 2019 to settle my debts and start up a business of my own. They saved me and my family from loosing our home as we were not able to pay tax bills. I am writing this message cause I feel it might be important for you out there seriously in need of a genuine loan in other for you not to fall into the wrong hands in search of a liable loan,I strongly advice you to contact this company via email: Houstonloanfirm@yahoo.com

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  80. Hello Everyone out there! I'm Alexanda hook, from Usa I am using this medium to announce to the general public on how Houston Loan Firm Company restored happiness to my home again, through the help of Mr Houston, When all hope was lost they granted me a loan sum of $50,000 on the 7th of February 2019 to settle my debts and start up a business of my own. They saved me and my family from loosing our home as we were not able to pay tax bills. I am writing this message cause I feel it might be important for you out there seriously in need of a genuine loan in other for you not to fall into the wrong hands in search of a liable loan,I strongly advice you to contact this company via email: Houstonloanfirm@yahoo.com

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  83. Contact Dr Winner now for Lottery Spell winning numbers Email:
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  84. HOW I WON $273 million WITH DR, MIRACLE LOTTERY MAGIC SPELL

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  85. HOW I WON $273 million WITH DR, MIRACLE LOTTERY MAGIC SPELL

    I am Eileen Murray From New York...I had to write back and say what an amazing experience I had with Dr, Miracle Jackpot lottery spell. My Heart is fill with joy and happiness after Dr, Miracle cast the Lottery spell for me, And i won $273 million. His spell change my life into riches, I'm now out of debts and experiencing the most amazing good luck with lottery after i won a huge amount of money. My life has really change for good. I won (Two hundred Seventy three million dollar )Your Lottery spell is so real and pure. Thank you very much Dr. Miracle for the lottery spell that change my life”I Am Totally Grateful For The Lottery Spell Dr, Miracle Did For Me. You Can Email Him For You Own Lottery Number,Because These Is The Only Secret To Win Lottery.

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  86. Is a great thing to announce to the general public for I have been saved and redeemed by winning a powerball lottery with a spell and a winning number from dr.oyalospellhome@hotmail.com I heard he has helped lot of people until he helped me this month to win my first $533M from mega million lottery. You too can try for your self today is just a spell and a winning number. His call/WhatsApp +2348169340571. This just a beginning I will win 🏆 more.
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  88. I want to use this miduim to thank Mr Houston for the good work he render to me, is with great joy and enthusiasm that i write on this internet forum because i finally have received my loan from a certain genuine lender whose name is Mr Houston ,his company name is Houston Loan Firm and for the good of you all who are still looking for a loan, this lender is endowed with all the good characteristics of a real loan lender . Judging from the loan they gave to me , their fast and reliable system of lending is not to be compared with any other,this is why i recommend any person seriously looking for a loan to contact him today and i am sure that he is willing to do for you what he has already done for me .

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  89. I want to use this miduim to thank Mr Houston for the good work he render to me, is with great joy and enthusiasm that i write on this internet forum because i finally have received my loan from a certain genuine lender whose name is Mr Houston ,his company name is Houston Loan Firm and for the good of you all who are still looking for a loan, this lender is endowed with all the good characteristics of a real loan lender . Judging from the loan they gave to me , their fast and reliable system of lending is not to be compared with any other,this is why i recommend any person seriously looking for a loan to contact him today and i am sure that he is willing to do for you what he has already done for me .

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  92. PERFECT LOTTERY SPELL THAT WORK FAST WITHIN 22 HOURS WITH DR WINNER LOTTERY SPELL POWERS

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  95. I am very happy, I wish to share my testimonies with the general public about what this man called Dr Enato has just done for me , this man has just brought back my lost Ex husband to me with his great spell, i was married to this man called Steven we were together for a long time and we loved our self's but when i was unable to give he a child for 2 years he left me and told me he can't continue anymore then i was now looking for ways to get him back until a friend of mine told me about this man and gave his contact email (ugbefenlovespell@gmail.com) then you won't believe this when i contacted this man on my problems he prepared this spell cast and bring my lost husband back, and after a month i miss my month and go for a test and the result stated am pregnant am happy today am a mother of a baby girl, thank you once again the great Dr Enato for what you have done for me, if you are out there passing through this same kind of problems you can contact he today on his mail (ugbefenlovespell@gmail.com) http://ugbefenlovespell.wordpess.com whatsapp +2348107927774
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  105. I am very grateful sharing this great testimonies with you, The best thing that has ever happened in my life is how i win the lottery. I am a woman who believe that one day i will win the lottery.finally my dreams came through when i email Dr WINNER . and tell him i need the lottery numbers. i have come a long way spending money on ticket just to make sure i win. But i never know that winning was so easy until the day i meant the spell caster online which so many people has talked about that he is very great in casting lottery spell, so i decide to give it a try.I contacted this man and he did a spell and he gave me the winning lottery numbers. But believe me when the draws were out i was among winners. i win 2.000.000 million Dollar. Dr. WINNER truly you are the best spell caster, with Dr WINNER you can win millions of money through lottery. i am so very happy to meet Dr WINNER, i will forever be grateful to you. Email him for your own winning lottery numbers now Winnersspellcast@gmail.com or contact him on his website:
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  115. Hello to all my viewers am Moore from Wisconsin USA I want to use this opportunity to thank Dr clement who help me to won sum of $66 million dollars for lotto. thanks Dr clement for helping me to win the lotto.I have been playing the lotto for the past 5 years now and i have not be able to wining. Ever since then i have not been able to win and i was so upset and i need help to win the lotto so i decided to go online and search for help,there i saw so many good testimony about this man called Great Dr clement how he have cast lucky spell lotto for people to win the lotto.I contact him also and tell him i want to win a lottery, he cast a spell for me which i use and i play and won $1 million dollars. I am so grateful to this man,just in-case you also need him to help you win,you can contact him through his allmightbazulartemple@gmail.com or whatsapp +2347051758952.and he will surely help you Contact him today and he will have a testimony ... Good luck!
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  143. PERFECT LOTTERY SPELL THAT WORK FAST WITHIN 24 HOURS WITH DR OYALO LOTTERY SPELL POWERS
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  144. PERFECT LOTTERY SPELL THAT WORK FAST WITHIN 24 HOURS WITH DR OYALO LOTTERY SPELL POWERS
    I saw so many testimonies about Dr Oyalo a great lottery spell caster that will help you cast a lottery spell and give you the rightful numbers to win the lottery, i didn't believe it, at first but as life got harder i decided to take a try, I contacted him also and told him i want to win a lottery he cast a lottery spell for me which i use and i play and i won $3,000,000 (THREE MILLION DOLLARS). I am so grateful to this man Dr Oyalo and i am making this known to every one out there who have been trying all day to win the lottery, believe me this is the only way to win the lottery, this is the real secret we all have been searching for. Do not waste time today contact Email:
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  145. I am very happy for sharing this great testimonies,The best thing that ha sever happened in my life is how I win the lottery euro million mega jackpot. I am a man who believe that one day I will win the lottery.finally my dreams came through when I email Dr Winner. and tell him I need the lottery numbers. I spend so much money on ticket just to make sure I win. But I never knew that winning was so easy until the day I meant the spell caster online which so many people has talked about that he is very great in casting lottery spell, so I decide to give him a try. I contacted this great Dr Winner and he did a spell and gave me the winning lottery numbers. But believe me when the draws came out I was among the lucky winners. I won 30,000 million Dollar. Dr Winner truly you are the best,with these great Dr you can win millions of money through lottery. I am so very happy to meet these great man, I will be forever grateful to you Dr Winner, if you are out there looking for his help you can reach him for easy communication on Whatsapp +2348138289852 or via Email: Winnersspellcast@gmail.com or via his website:https://winnersspellcast.blogspot.com

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  146. This is the most wonderful thing i have ever experienced. I visited here online on the 5th of September and i saw a marvelous testimony of laura Aldana from United States on the forum about the good works of DR GBOGBO I never believed it, because have never heard anything about such miracle before. No body would have been able to convince me about it not until DR.GBOGBO did a marvelous work for me that restored my mairage of 4 years by getting back my husband back i just as i read on the internet. I'm Tricia Alan I was truly shocked when my husband knelt down pleading for forgiveness to accept him back. I am really short of words to use to show my appreciation to DR.GBOGBO For his a God sent to me and my entire family for divine restoration of my marriage. Contact him now for any kind of help via Email ( gbogbospelltemple@gmail.com ) or you add him on whatsApp number ( +2347059106059 ) or call him, get all your problems solve No problem is too big for him to solve..Contact him now Tricia Alan THANKS TO Dr Gbogbo

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  147. AM SANDRA FROM CANADA, THANKS TO DR ONIHA WHO HELP ME BRING MY HUSBAND BACK, MY HUSBAND LEFT ME WITH THREE KIDS, FOR ANOTHER YOUNG GIRL, FOR OVER TWO YEARS, I TRIED ALL I COULD TO SETTLED OUR DIFFRENCES, BUT IT YIELDED NO RESULT, I WAS THE ONE TAKING CARE OF THE CHILDREN ALONE, UNTIL ONE DAY, I CAME IN CONTACT WITH SOME ARTICLES ONLINE, CONTAINING HOW DR ONIHA HAS HELP SO MANY LOVERS AND FAMILY REUNION AND REUNIT AGAIN, AND I DECIDED TO CONTACT HIM, AND HE CAST HIS SPELL ON MY HUSBAND, WITHIN FIVE DAYS, MY HUSBAND RAN BACK HOME, AND WAS BEGGING ME AND THE KIDS FOR FORGIVENESS, IN CASE YOU ARE PASSING THROUGH SIMILAR PROBLEMS, AND YOU WANTS TO CONTACT DR ONIHA, YOU CAN REACH HIM VIA HIS CONTACT NUMBER, ON CALL OR WHATSAP +2347089275769 OR EMAIL DRONIHASPELL@YAHOO.COM

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  148. I am very happy for sharing this great testimonies,The best thing that ha sever happened in my life is how I win the lottery euro million mega jackpot. I am a man who believe that one day I will win the lottery.finally my dreams came through when I email Dr Winner. and tell him I need the lottery numbers. I spend so much money on ticket just to make sure I win. But I never knew that winning was so easy until the day I meant the spell caster online which so many people has talked about that he is very great in casting lottery spell, so I decide to give him a try. I contacted this great Dr Winner and he did a spell and gave me the winning lottery numbers. But believe me when the draws came out I was among the lucky winners. I won 30,000 million Dollar. Dr Winner truly you are the best,with these great Dr you can win millions of money through lottery. I am so very happy to meet these great man, I will be forever grateful to you Dr Winner, if you are out there looking for his help you can reach him for easy communication on Whatsapp +2348138289852 or via Email: Winnersspellcast@gmail.com or via his website:https://winnersspellcast.blogspot.com

    ReplyDelete
  149. I am very happy for sharing this great testimonies,The best thing that ha sever happened in my life is how I win the lottery euro million mega jackpot. I am a man who believe that one day I will win the lottery.finally my dreams came through when I email Dr Winner. and tell him I need the lottery numbers. I spend so much money on ticket just to make sure I win. But I never knew that winning was so easy until the day I meant the spell caster online which so many people has talked about that he is very great in casting lottery spell, so I decide to give him a try. I contacted this great Dr Winner and he did a spell and gave me the winning lottery numbers. But believe me when the draws came out I was among the lucky winners. I won 30,000 million Dollar. Dr Winner truly you are the best,with these great Dr you can win millions of money through lottery. I am so very happy to meet these great man, I will be forever grateful to you Dr Winner, if you are out there looking for his help you can reach him for easy communication on Whatsapp +2348138289852 or via Email: Winnersspellcast@gmail.com or via his website:https://winnersspellcast.blogspot.com....

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