Circular flow model Flashcards
Three major flows:
Production flow.
Income flow.
Spending flow.
Production flow:
Production of goods and services by firms. How to produce is answered.
Income flow:
Flow of income to households which they earn from making the factors of production available. Question for whom to produce is answered.
Spending flow:
Spending by households on goods and seervices produced by firms. Questions of what to produce is answered.
Participants in circular flow:
Households and firms.
Households:
Are the biggest owners of the factors of production.
Characteristics:
Owners and sellers of production factors.
Consumers and buyers of consumer goods and services.
Firms:
Combine and transform factors of production to produce goods and services. Active participants in the factor market as buyers of the factors.
Characteristics:
Buyers of factors of production.
Producers and sellers of goods and services.
Markets in circular flows:
Factor market.
Goods market.
Factor market:
Market in which the factors of production are bought and sold. Through this market that households supply businesses with the factors of production in exchange for income.
Goods market:
Households buy their goods and services and the producers supply.
Real and nominal flows:
Real flows refer to the flow of real things such as goods and services. Nominal flows refer to flow of money in the form of money income.
Monetary flow:
Is the flow of spending money by households to firms for goods and services.
Impact of change in a flow:
Spending increases, monetary flow increases. Through the goods market.
Goods move from firms to households, real flow increases.
Increased spending causes firms to increase production. Firms increase production, production flow increases and factors of production are employed.
Increase in the income flow through the factor market.
