What is the circular flow model?

• What are the two main markets shown in the image?

  Product Market and Factor Market
• How do households and firms interact in the circular flow?

  • Households provide factors (labor, capital, land) to firms
  • Firms provide incomes (wages, rent, interest, profit) to households
  • Households use those incomes to spend on goods and services from firms
  • Firms use the factors provided by households to produce those goods and services
• What do households pay firms for in the product market?

  Goods and services
• What are the main components of the Product Market?

  • Households
  • Firms
  • Government
  • Expenditures
• What are the factors of production provided by households to firms?

  Labor, capital, resources
• How would an increase in household spending affect the circular flow?

  • Increased spending by households would lead to more demand for goods from firms
  • This would increase the flow of spending from households to firms
  • Firms would then need to increase production, requiring more factors from households
  • This would increase the flow of factors from households to firms
• What is the first step in the flow of goods and services?

  Firms produce goods
• What does the diagram illustrate about the flow of goods and services?

  • Shows the direction of flow
  • Firms produce goods
  • Households buy goods and services
  • Households provide factors of production
  • Continuous cycle between firms and households
• According to the circular flow diagram, who owns factors of production?

  Households
• What is the role of firms in the circular flow diagram?

  • Manufacture and sell goods and services to consumers.
  • Provide jobs.
  • Use factors of production provided by households.
  • Receive revenue from sales.
• What do firms provide to households in the factor market?

  Incomes like wages
• What are the key interactions between the elements in the circular flow diagram?

  • Households provide factors (labor, capital, land) to firms
  • Firms use those factors to produce goods and services
  • Firms provide incomes (wages, rent, interest, profit) to households
  • Households use those incomes to spend on the goods and services from firms
  • This circular flow of factors, incomes, spending, and goods continues
• In the expanded circular flow model, what role does government spending play?

  It acts as an injection into the economy
• What role do households play in the circular flow diagram?

  • Buy and consume goods and services from firms.
  • Provide factors of production (land, labour, capital, enterprise) to firms.
  • Receive income (rent, wages, interest, profit) from firms.
• What do households provide in the factor market?

  Resources like labor
• What do firms sell in the product market?

  Goods and services to households
• What are the four main elements in the circular flow diagram?

  • Households
  • Firms
  • Factors
  • Incomes
  • Spending
  • Goods
• What are the main components of the Factor Market?

  • Households (Owners of Factors of Production)
  • Firms (Demanders of Factors of Production)
  • Monetary Flow
  • Physical Flow
• What is the basic cycle described in the simple circular flow model?

  Households buy food, firms pay for work
• How does the inclusion of banks lending out savings affect the circular flow model?

  It introduces an injection into the economy
• What are injections and leakages in the circular flow model?

  • Injections: Additions to the circular flow, like investment, government spending, and exports
  • Leakages: Withdrawals from the circular flow, like savings, taxes, and imports
• What does the expanded circular flow model include that the basic model does not?

  Injections and leakages