the circular flow Flashcards
who are the participants in the circular flow
households
businesses [firms]
the government
describe households as participants of the circular flow
made up of people who live and make economic decisions together
can be individuals, family or by any group of people with a joint income
households own the factors of productions [NELC]
they sell the use of these FoP to businesses in exchange for money
households use the remuneration [interests, wages, rent and profit] to buy goods and services to satisfy their needs and wants
describe businesses as participants of the circular flow
businesses aim to make a profit
they do this by providing goods and services to customers [households and other businesses]
businesses needs the FoP [NELC] provided by household in order to operate
the money they recieve from selling their products and services is used to pay back households for the use of their FoP [ Interest, wages, rent, profit]
describe the government as participants of the circular flow
the government also participates in the economy
the government gets involved by providing goods and services that businesses would not normally provide but are essential for the economy
the government here refers to local, provincial and national government and government run or partly owned businesses
the government buys FoP from households and provides households and businesses with public goods services [refusal removal, roads, streetlights, etc.]
the government collects taxes from households and businesses to pay for these services and to run these government departments
the government also buys goods and services from businesses
summarise the circular flow
households supply FoP to businesses
in exchange for FoP businesses pay households [income to households]
businesses supply goods and services to households
households pay for goods and services [income to businesses]
what is the goods and service market
this is where businesses sell their goods and services and households [consumers] buy them
what is the factor market
this is the market where households sell their FoP and businesses buy these FoP
an employment agency can be seen as a factor market as labor is bought and sold through it
a bank can be seen as a factor market as capital can be bought and sold through it
there is a variety of different factor markets
what is the real flows
the real flows are flows of goods and services and FoP within the circular flow
what is the money flows
the money flows are the flows of incomes and expenditures within the circular flow
the importance of the circulation of money in the economy
the whole economy is driven by the flow of money, where the different role players buy and sell goods and services from one another
the more time money moves from one person to another, the more people benefit and the greater the economic activity in that economy
What is a market?
a market is anywhere something is bought and sold and does not necessarily have to be a place
