1. Households Role of Producers & Consumers in a Market Economy Services/income Labor/payments Income/goods Taxes/labor EPF2j. Circular flow of Economic Activity Services/payments Government Businesses Taxes/goods

2. Circular Flow of Economics A nation’s overall levels of income, employment and prices are determined by the interaction of spending and production decisions made by all households, firms, gov’t agencies and others in the economy. 2

3. Impact of 1 Person One person’s spending is other people’s income When consumers make purchases, goods and services are transferred from businesses to household in exchange for money payments That money is used in turn by businesses to pay for natural resources, human resources and capital goods and to pay taxes. 3

4. Essential question: What does the circular flow model show? 4

5. 5 Households Services/income Labor/payments Income/goods Taxes/labor Services/payments Government Businesses Taxes/goods

6. The circular flow model illustrates the way in which resources, goods and services, and money flow among individuals, businesses, and governments in a market economy 6

7. Essential question: How does the circular flow model illustrate the way in which resources, goods and services, and money flow among individuals, businesses and govts in a market economy? 7

8. Individual Households: In a market economy, resources are owned by the households; this includes natural, capital, and human resources and entrepreneurial skills. Individuals in households may: take their resources to market (called the factor market, referring to the factors of production)and sell them; they may choose not to sell their resources (as in people who choose not to work for pay). 8

9. Households, cont. Households generally receive income from the sale of resources; they can spend this money or save it. Households may take their income to the goods and services market to buy the things they want. 9

10. Business Firms Go to the factor market and buy or hire the resources they need to produce goods and services Firms take the money from those sales to order more from the businesses. The businesses buy more resources to produce more and the money continues to flow through the economy. 10

11. The Gov’t Buys goods, services, and resources in order to produce certain goods and services. Tax on income and sales is collected by the gov’t to pay for gov’t-provided goods and services (e.g., interstate highways, postal service). 11