UNIT TWO (1): Market Economy and the Circular Flow Model

THE MARKET ECONOMY

Circular Flow Model

• The two markets are factor and product. 
• In the circular flow model, expenditure flows are the monetary activities that households contribute to the product market, which supply the firms. In return, the income flows, that develop from the firms, provide jobs to the factor market which the households fill in for income.

1. FACTOR MARKET: Firms buy and household sells

• Household ---> Factors of Production (supply) = Factor Market
• In return, Factor Market ---> wages, rents, interest, and profits (demand) = Household
• A shorter way to remember is willy rest in peace (WRIP)
• ex: Taco Bell just hired you to assemble tacos
• With Firms, they buy resources and sell products.
• FIRMS---> cost = Factor Market
• Factor Market ---> Resources; Factors of Production(demand)= Firm

      2. PRODUCT MARKET: Firm sells and household buys

• dec. US EXPORTS, inc. FOREIGN EXPENDITURES, dec. US EXPENDITURES, inc. US IMPORTS
• Households sell resources and buy products. 
• From Product Market to Firms and Firms to Product Market:
• Product market ---> total revenue = firms
• Firms ---> (supply) Goods and services = Product Market
• From Product to Household and Household to Product:
•  Product Market ---> (demand)Goods and services = household
• Household --->  consumption expenditures = Product Market 

     3. FACTOR/PRODUCT MARKET/FIRMS/HOUSEHOLD TO THE GOVERNMENT

• GOVERNMENT: both producer and consumer in both markets.

a. the non-government listed
b. what they give the government
c. what the government gives them

1. A) Factor Market
   B) Resources
   C) Expenditures  
2. A) Product Market
   B) Goods and Services
   C) Expenditures
3. A) Firms
   B) Taxes
   C) Goods and Services
4. A) Household
   B) Taxes
   C) Goods and Services