Review of Microeconomic Activities: Markets for factors (inputs) of production Markets for goods and services Buyers Markets for goods and services Markets for factors (inputs) of production Sellers
Review of Microeconomic Activities: Optimal satisfaction AsBuyers Minimal Cost Maximum Income Profit Maximization AsSellers
Review of Microeconomic Activities: Consumer Surplus Producer Surplus Surplus
From Microeconomic Analysis to Macroeconomic Analysis: First, analysis of markets (microeconomics) Next, analysis of economic sectors (macroeconomics): 2-Sector Circular Flow (basic sectors directly connected to the markets; basic economy) 5-Sector Circular Flow (3 additional sectors to complete the economy)
The Basic (2-Sector) Circular Flow Model a simple economic model which describes the reciprocal circulation of income between producers and consumers. In the circular flow model, the inter-dependent entities of producer and consumer are referred to as "firms" and "households" respectively and provide each other with factors in order to facilitate the flow of income. Firms provide consumers with goods and services in exchange for consumer expenditure and "factors of production" from households.
The Basic (2-Sector Circular Flow Model Assumptions: (ideal situation) The economy consists of two sectors: households and firms. Households spend all of their income (Y) on goods and services or consumption (C). There is no saving (S). All output (O) produced by firms is purchased by households through their expenditure (E). There is no financial sector. There is no government sector. There is no international sector.
The Basic Circular Flow Model The Simple Maths: Y = E E = C C = O /.: Income Perspective: Y = C
The 5-Sector Model A more realistic representation of the economy. Unlike the two sector model where there are six assumptions the five sector circular flow relaxes all six assumptions. Since the first assumption is relaxed there are three more sectors introduced.
The 5-Sector Model The Three Additional Sectors: The Financial Sector The Government Sector The International (or Overseas) Sector
The 5-Sector Model Income (Y) Resources HOUSEHOLDS FIRMS Output (O) Consumption/Expenditures (E) INJECTIONS L E A K A G E S Savings (S) Investments (I) FINANCIAL SECTOR Government Spending (G) Taxation (T) GOVERNMENT SECTOR Imports (M) Exports (X) INTERNATIONAL SECTOR
The 5-Sector Model LEAKAGES Savings (S) Taxes (T) Imports (M) INJECTIONS FINANCIAL SECTOR Investments (I) Government Spending (G) Exports (X) GOVERNMENT SECTOR INTERNATIONAL SECTOR
The Basic Circular Flow Model The Simple Maths: Since Y = C + S + T + M Y= C + I + G + X Then, S + T + M = I + G + X (Leakages) (Injections)
The Basic Circular Flow Model If: S + T + M = I + G + X S + T + M > I + G + X S + T + M < I + G + X Then, we have a: More or less Stable Economy. Contracting or Shrinking Economy. Growing economy.