The document describes a classroom activity to simulate the circular flow of economic activity. In the activity, half the class takes on the role of households who own resources that they sell to businesses, while the other half plays businesses who use the resources to produce products that are then sold back to households. The activity aims to demonstrate how resources and money circulate between producers and consumers in a market economy through production and exchange.

1. The CircularFlow of
Economic Activity
A lesson in Market
Economic Systems

2. Human
Natural
Capital
1. Households own and control
resources and sell them to
businesses.
B
U
S
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N
E
S
S
H
O
U
S
E
H
O
L
D
S

3. 2. Businesses use the resources to
make finished products.
Econo’s
B
U
S
I
N
E
S
S

4. 3. Businesses take finished
products and sell them to
households.
Econo’s
B
U
S
I
N
E
S
S
H
O
U
S
E
H
O
L
D
S

5. The Activity
• Half the class will be households.
They will own 15 resource cards.
Households sell resources and buy the product.
• Half the class will be businesses. They will
have $1000.
Businesses buy resources, make the product, and
the sell product.

6. Econoland Factory

7. The Activity
Top Businesses: The one’s that make the most
money.
Class record $2500
Hr 2 Riley - $1700, Hr 3 Ehret - $1600, Hr 4 Oman
- $2000
Top Household: The one’s that buy the most
“Econo’s”
Class record 11
Hr 2 Middleton – 8, Hr 3 Hauth – 7, Hr 4 Housley -
10

8. Households/Businesses
1. What strategy worked best foryou?
2. What would you change if we did the
activity again?
3. Which group had it easier, the
businesses orhouseholds and why?

9. Questions on CircularFlow
1. Which group started with the money?
2. Which group ended with (most of) the money?
3. How many transactions tookplace forthis result to
occur?
4. Which group started with the resources?
5. Which group ended with the products (econo’s)?
6. How many transactions tookplace forthis result to
occur?
7. What was exchanged in the initial transactions?
8. What name could you give the initial transactions?
9. What was exchanged in the secondary transactions?
10. What name could you give the secondary
transactions?

10. The Circular Flow of Economic
Activity

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

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

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

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

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

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

17. The CircularFlow
Describe how you
have been
involved in the
flow over the last
week of your life.

18. The Circular Flow of
Economic Activity
• The flow of payments in an economy is a
circularflow.
• Individuals--people living in households--
workforbusinesses, rent theirproperty
(ortheircapital) to businesses, and
manage and own the businesses.

19. The Circular Flow of
Economic Activity
• All these activities generate incomes--
flows of payments frombusinesses to
households.
• But households then spend their
incomes--on consumption goods, in taxes
paid to governments, and on assets like
stockcertificates and bankCDs that flow
through the financial sector.

20. The Circular Flow of
Economic Activity
• The two flows--of incomes and of
expenditures--are equal: all expenditures
on products are ultimately someone's
income, and every piece of total income is
also expended in some way

21. ADAMSMITH
• It is an account of
economics at the dawn of
the Industrial Revolution,
as well as a rhetorical
piece written forthe
generally educated
individual of the 18th
century - advocating a
free market economy as
more productive and
more beneficial to
society.

22. ADAMSMITH
“Invisible Hand of the Market”
• The self-
regulating
nature of
the
market-
place.

23. “Invisible Hand of the Market”
• "It is not fromthe benevolence of the butcher,
the brewerorthe bakerthat we expect our
dinner, but fromtheirregard to theirown self-
interest... Every individual intends only his own
security, only his own gain. And he is in this led
by an invisible hand to promote an end which
was no part of his intention. By pursuing his
own interest, he frequently promotes that of
society more effectually than when he really
intends to promote it."

24. “Invisible Hand of the Market”
• The natural force that guides free market
capitalismthrough competition forscarce
resources. According to AdamSmith, in a
free market each participant will tryto
maximizeself-interest, and the interaction
of market participants, leading to
exchange of goods and services, enables
each participant to be betteroff than
when simply producing for
himself/herself.

25. “Invisible Hand of the Market”
• Anothermisconception is that the
invisible hand is a formof
individualism. It would be hard to
call the actions of a bakerwho
spends all day baking bread for
strangers "individualism."

26. “Invisible Hand of the Market”
• It is simply untrue that personal greed will
always result in society's best interest:
crime is a devastating counter-example.
• The very reason we have police and
criminal justice systems is to prevent the
harmcaused to society by individuals
seeking to enrich themselves at the
expense of the group.