The Curcular Flow Model for a Market Oriented System

Question 1

Which groups are the two decision makers in the private sector economy?

Answer 1

Households and Businesses

Question 2

What influences decisions by the private sector groups?

Answer 2

The Market System

Question 3

What happens in the RESOURCE MARKETS?

Answer 3

1. ) Households SELL resources directly and indirectly (through ownership of corporations)
2. ) businesses BUY resources in order to produce goods and services
3. ) Flow of payments from businesses for the resources constitutes BUSINESS COSTS and resource owners’ INCOMES

Question 4

What happens in the PRODUCT MARKETS?

Answer 4

1. ) Households BUY goods and services
2. ) Businesses SELL products
3. ) Flow of consumer expenditures constitutes sales receipts for businesses

Question 5

What does the Circular Flow Model illustrate?

Answer 5

Illustrates the complex web of decision-making and economic activity that give rise to the real and money flows

Question 6

What are the LIMITATIONS of this model?

Answer 6

1. ) Does not depict transactions between households and between businesses
2. ) Ignores government and the “rest of the world” in the decision-making process
3. ) Does not explain how prices of products and resources are actually determined

Question 7

Who are the participants of the model?

Answer 7

• Households
• Firms
• Factor Markets
• Goods and Services Markets