Circular Flow of Economics The circular flow model is defined as the flow of resources from households to firms and of products to firms from households. These flows are accompanied by reverse flows of money from firms to households and from households to firms. The circular flow is comprised of the resource market, households, product market, businesses, and the government. Macroeconomics – The study of the aggregate (total) Behavior of the whole economy. Macroeconomics Aggregates: – Unemployment rate: Percent of people in the labor force is not working but searching for work. – Inflation rate: Percent rise in the average price of all goods and services. – GDP: Dollar value of all final goods and services produced within a country in a given year; output A Market is an institution or mechanism which brings together buyers (demanders) and sellers (suppliers) of particular goods and services.
The Forces of supply and demand – In the United States and in other free enterprise systems, the distribution of resources and products is determined by supply and demand. Demand is the number of goods and services that consumers are willing to buy at different prices at a specific time. A fundamental characterisic of demandis all else being constant, as prices fall, the quantity demanded rises. Vice versa all ther things remaining the same as price increases, the corresponding quanity demanded falls. Supply – The number of products-goods and services that businesses are willing to sell at different prices at a specific time. As price increases, the corresponding quantity supplied increases; as prices fall, the quantity supplied also falls. Equilibrium Price – The supply and demand curves intersect at the point where supply and demand are equal.
The price at which the number of products that businesses are willing to supply equals the amount of products that consumers are willing to buy at a specific point in time. The United States and the economy – The United States has the most powerful, diverse, and technological advanced economy in the world. Oriented economy, private individuals, and business firms make most of th decisions. Government purchases of goods and services are made predominantly in the marketplace. US business firms have greater flexibility than their counterparts in Western Europe and Japan in decisions to expand capital plant, lay off surplus workers, and develop new products.
In all economic sectors, US firms are at or near the forefront in technological advances, especially in computers, medical equipment, and aerospace, although their advantage has steadily narrowed since the end of World War 2. The excelled technology explains the gradual development of a ” two – tie labor market” in which those at the bottom lack the education and professional / technical skills of those at the top and, fail to get pay raises, health insurance coverage, and other benefits. The circular flow – The continuous movement of production, income, and resources between producers and consumers. This flow moves through product markets, as the gross domestic product of our economy and is the revenue received by businesses in payment for this production. The flow of revenue flows to resource markets as payments by businesses for the resources employed in production.
The payment received by resource owners is income. Resource owners use this income to purchase goods and services through the product markets. This flow can be altered in a number of different ways, especially by government. Taxes are sliced by income, wages, profit, etc., but are then used for expenditures by government on other things bought through the product markets. Consumers also divert a portion of their income into saving, which is then used to finance the federal deficit or business investment.
For every buyer there is a seller, The seller receives what the buyer buys, The buyer gives money for goods and the seller gives goods for money. National income is the total value of all factor payments during a period of time. Thenational income is a measure of the total economic flow through the factor marker. Gross national product should equal the national income. GDP is the total market value of all final goods and services produced during a given period and time within the nations borders. Gross domestic product is the most common measure of the level of economic activity at the national level.