circular flow of income Flashcards
what are households and what do they do?
The owners of economic resources/the four factors of production.
They sell these to firms in resource markets.
what are businesses/firms and what do they do?
Buy the factors of production in resource markets
and use them to produce goods and services.
what is the market of resources and what does it do?
Where households sell resources.
Where businesses buy these economic resources (L,L,C,E).
what is the market of goods and services/products and what do they do?
Where businesses sell g&s.
Where households buy these g&s.
what is income?
Households sell resources in exchange for money =
what is revenue?
Businesses sell g&s in exchange for money =
what is the cost of production and what is it responsible for?
Businesses buy resources;
exchange revenue earned in the market for g&s =
why is the circular flow of income important?
Simple tool for learning about the economy
Shows how money keeps economic resources and goods & services moving around in the economy.
Shows the relationships between households and businesses (firms)
& how these 2 different decision-makers in the economy fit together.
Thus shows the flow of economic resources, goods & services and the flow of money.
what are the 2 Types of Economic decision-makers/agents:
Households
Businesses (firms)
what are the 2 Types of Markets:
Product market
(market for goods & services)
Resource market
(market for resources)
if products flow one way…..
…. money flows the other.
if households do labour, what do they receive?
wages
if households give land, what do they receive?
rent
if households give/do capital, what do they receive?
interest
if households are/do entrepreneurship, what do they receive?
profit
households holding income use it to do what?
buy goods and services from businesses.
businesses holding resources, use it to do what?
produce goods and services for revenue.
Circular flow of income diagram shows:
How businesses and households interact in the two markets.
The flow of money in exchange for goods & services and resources.
what is a market?
Any structure that allows
buyers and sellers to exchange
any type of goods, services and information.
what is a free market?
A market economy based on
supply and demand with
little or no government control.
