Circular Flow Chart

Objectives
1. Analyze a circular flow model of a pure
market economy.
2. Explain how you act as both a buyer and
a seller.
3. Explain the economic interdependence of
this model.
2 Sector Circular Flow Model
Our two sectors are :
1. Households
2. Business Firms
 Product Market
Products = Goods & Services

Consumer Expenditures

Households Businesses

Nat’l Income = Rent, Wages, Interest, Profit

Resources = Land, Labor, Capital, Entrepreneurship

Resource Market
 Two Sectors

Households Businesses

©2012, TESCCC
©2012, TESCCC

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 Households
• Households are the owners of the
resources, land, labor and capital.
Households become the entrepreneurs.
They sell these resources to the
business firms.

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 Households Businesses

Resources = Land, Labor, Capital, Entrepreneurship

Resource Market
 Business Firms
• Business firms make money payments
back to households for the resources.
This makes up what we call national
income.
 Households Businesses

Nat’l Income = Rent, Wages, Interest, Profit

Resources = Land, Labor, Capital, Entrepreneurship

©2012, TESCCC
Resource Market ©2012, TESCCC

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 Resource Market
• This exchange of resources for income
payments takes place in what we call
the resource market. Households are
the sellers and business firms are the
buyers.

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 Business firms
• Business firms take the resources and
turn them into products. A product can
be a good or a service. They then sell
the products to the households.
 Product Market
Products =Goods & Services

Households Businesses
 Households

• Households use the income they

earned from selling resources to
purchase these products. This is called
consumer expenditures.
 Product Market
Products =Goods & Services

Consumer Expenditures

Households Businesses
 Product Market
• This exchange of products for consumer
expenditures takes place in the product
market. The business firm is the seller
and households are the buyers.
 Product Market
Products=Goods & Services

Consumer Expenditures

Households Businesses

Nat’l Income = Rent, Wages, Interest, Profit

Resources = Land, Labor, Capital, Entrepreneurship

Resource Market
 Real Flow
• This is the flow of resources from
household to business firms and the
flow of finished products from business
firms to households.
 Product Market
Products =Goods & Services

Households Businesses

Resources = Land, Labor, Capital, Entrepreneurship

Resource Market
 Money Flow
• This is the money from business firms
to households as income. From
households to business firms it is
consumer expenditures, consumers
buying products.
 Product Market

Consumer Expenditures

Households Businesses

Nat’l Income = Rent, Wages, Interest, Profit

Resource Market
 Product Market
Products =Goods & Services

Consumer Expenditures

Households Businesses

Nat’l Income = Rent, Wages, Interest, Profit

Resources = Land, Labor, Capital, Entrepreneurship

Resource Market
 Resource Market
• Buyers: Business Firms
• Sellers: Households

• Exchange: Factors of production (land,

labor, capital and entrepreneurship)
for
National income
(rent, wages, interest, profit)
 Product Market
• Buyers: Households
• Sellers: Business Firms

• Exchange: Goods & services

for
Consumer Expenditures
part of GDP
How do government actions affect the CFM and how is
the CFM affected by the rest of the world?

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