Circular Flow of Income Our economy is an enormous, constant cycle, with money, products, and energy flowing back and forth Economists refer to this as the Circular Flow of Economic Activity Economic Interdependence Businesses, households, and the government depend on each other in order for the economy to run smoothly.

1. Circular Flow of Income
Unit 3
Instructor:
Atta Hussain Syed

2. Vocabulary
• Economic Interdependence- Businesses, households, and
the gov’t all depend on each other in order for the
economy to run smoothly.
• Factor Market- In economics , a factor market refers to
markets where services of the factors of production are
bought and sold, such as the labor markets, the capital
market, the market for raw materials
• Product Market- In economics, the product market is the
marketplace in which final goods or services are offered
for purchase by consumers, businesses, and the public
sector.

3. •A household is a person or a group of people that share
their income.
•A firm is an organization that produces goods and services
for sale.
•Firms sell goods and services that they produce to
households in markets for goods and services.
•Firms buy the resources they need to produce—factors of
production—in factor markets.
Vocabulary

4. The Circular Flow
• Our economy is an enormous, constant cycle, with
money, products, and energy flowing back and
forth
• Economists refer to this as the Circular Flow of
Economic Activity
• Economic Interdependence
• Businesses, households, and the government depend
on each other in order for the economy to run
smoothly.

5. Example-1

6. Households
are where you find
regular people who
work and consume in
our economy

7. Households Firms
are the businesses that
produce, employ us,
and purchase in our
economy

8. Households Firms
Factor
Market
The factor market
is where the four
factors of
production are
bought and sold.

9. The Factor Market
Households Firms
Factor
Market
Households
contribute their
land, labor, skills,
and capital to the
factor marker.
Four Factors

10. Households Firms
Factor
Market
Those things are
put to use in firms.
Four Factors Four Factors

11. The Product Market
Households Firms
Factor
Market
The product
market is where
firms sell their
goods and
services and
people buy them.
Product
Market
Four Factors Four Factors

12. Households Firms
Factor
Market
Firms send those
goods and
services into the
market.
Product
Market Goods and Services To Be Sold
Four Factors Four Factors

13. Households Firms
Factor
Market
Product
Market
The goods and
services go back
into households.
Purchased Goods and Services Goods and Services To Be Sold
Four Factors Four Factors

14. Households Firms
Factor
Market
Product
MarketPurchased Goods and Services Goods and Services To Be Sold
Four Factors Four Factors
Wages and Salaries
Meanwhile, firms
put money back
into the factor
market in the form
of wages and
salaries.

15. Households Firms
Factor
Market
Product
MarketPurchased Goods and Services Goods and Services To Be Sold
Four Factors Four Factors
Income Wages and Salaries
This money is the
income
households earn.

16. Households Firms
Factor
Market
Product
MarketPurchased Goods and Services Goods and Services To Be Sold
Four Factors Four Factors
Income Wages and Salaries
Expenditures
Households spend
this money on
goods and
services

17. Households Firms
Factor
Market
Product
MarketPurchased Goods and Services Goods and Services To Be Sold
Four Factors Four Factors
Income Wages and Salaries
Expenditures Revenue
And businesses
earn revenue.

18. Households Firms
Factor
Market
Product
MarketPurchased Goods and Services Goods and Services To Be Sold
Four Factors Four Factors
Income Wages and Salaries
Expenditures Revenue

19. A Simplified Version
RESOURCES
FINISHED GOODS
WAGES AND SALARIES
EXPENDITURES
BusinessesHouseholds

20. Example-2

21. The Circular Flow of Economic
Activity

22. The Circular Flow of Economic
Activity
Two
markets
exist in the
circular
flow
FACTOR
MARKET
PRODUCT
MARKET

23. The Circular Flow of Economic
Activity
FACTOR
MARKET
PRODUCT
MARKET
Two
markets
exist in the
circular
flow

24. The Circular Flow of Economic
Activity
FACTOR
MARKET
PRODUCT
MARKET
Resources;
Land, Labor
Capital

25. The Circular Flow of Economic
Activity
FACTOR
MARKET
PRODUCT
MARKET
Resources;
Land, Labor
Capital
$$$ pay for
Resources

26. The Circular Flow of Economic
Activity
FACTOR
MARKET
PRODUCT
MARKET
Resources;
Land, Labor
Capital
$$$ pay for
Resources
Finished
Goods
and services

27. The Circular Flow of Economic
Activity
FACTOR
MARKET
PRODUCT
MARKET
Resources;
Land, Labor
Capital
$$$ pay for
Resources
$$$ pay for
Product
Finished
Goods
and services