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2.circular Flow Model

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8 views

2.circular Flow Model

Uploaded by

cam.guerre
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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CIRCULAR FLOW MODEL

How are resources allocated in a


market economy?

agosto 23, 2015 J. Michael McGuire 1


REVIEW
1. What is the foundation experience of
economics?
2. What is the definition of “economics”?
3. What is the definition of
“macroeconomics”?
4. What are the 5 steps of an economic
analysis?
agosto 23, 2015 J. Michael McGuire 2
REVIEW
5. The central bank just lowered interest
rates. Effect on AD?
Price AS

$50 DEMAND INCREASES


PRICE? PRODUCTION?
$30
AD AD2
Quantity
$500 $700

agosto 23, 2015 J. Michael McGuire 3


TODAY’S CLASS
1. Our “Economic System” – The Circular
Flow Model.
a. The elements: markets and agents
b. Their relationships
c. Answers to 3 critical questions

2. Evaluations of the system


agosto 23, 2015 J. Michael McGuire 4
TWO TYPES OF MARKETS
Exchange
RESOURCE
Land
MARKETS
Labor
“Market”: anyplace Capital
where buyers and
sellers meet for the
purpose of exchange.
Exchange
Final Goods
PRODUCT &
MARKETS Services
agosto 23, 2015 J. Michael McGuire 5
TWO ECONOMIC AGENTS
People who allocate resources

BUSINESSES HOUSEHOLDS

agosto 23, 2015 J. Michael McGuire 6


HOUSEHOLDS DEMAND
G&S
RESOURCE
MARKET

Consumer
BUSINESSES HOUSEHOLDS
Sovereignty
!

PRODUCT
MARKET DEMAND G&S

agosto 23, 2015 J. Michael McGuire 7


BUSINESSES SUPPLY G&S
RESOURCE
MARKET

BUSINESSES HOUSEHOLDS

SUPPLY
PRODUCT
MARKET DEMAND
agosto 23, 2015 J. Michael McGuire 8
BUSINESSES DEMAND L,L,K
DEMAND
RESOURCE
MARKET

BUSINESSES HOUSEHOLDS

SUPPLY
PRODUCT
MARKET DEMAND
agosto 23, 2015 J. Michael McGuire 9
HOUSEHOLDS SUPPLY L,L,K
DEMAND ($)
RESOURCE
MARKET SUPPLY

BUSINESSES HOUSEHOLDS

SUPPLY
PRODUCT
MARKET DEMAND ($)
agosto 23, 2015 J. Michael McGuire 10
CIRCULAR FLOW OF. . . $
DEMAND w. $ $
RESOURCE
MARKET SUPPLY $
$

BUSINESSES HOUSEHOLDS

SUPPLY
$ PRODUCT
$ MARKET DEMAND w. $
agosto 23, 2015 J. Michael McGuire 11
CIRCULAR FLOW with
government
DEMAND w. $ $
RESOURCE
MARKET SUPPLY $
$
g&s G S g&s
BUSINESSES HOUSEHOLDS
tax tax
G g&s
SUPPLY
$ PRODUCT
$ MARKET DEMAND w. $
agosto 23, 2015 J. Michael McGuire 12
The Circular-Flow Diagram

Money Households Money

Goods
and Factors
services

Markets for
goods and Factor Markets
services

Goods
and Factors
services

Firms
Money Money
Circular-Flow of Economic Activities

• A household is a person or a group of


people that share their income.
• A firm is an organization that produces
goods and services for sale.
• Firms sell goods and services that they
produce to households in markets for
goods and services.
• Firms buy the resources they need to
produce goods and services—factors of
production—in factor markets.
Circular-Flow of Economic
Activities
• Ultimately, factor markets determine the
economy’s income distribution — how
total income is divided among the
owners of the various factors of
production.
Growth in the U.S. Economy from 1962…
…to 1988
Three Questions That
Determine Allocation

1. WHAT SHOULD WE PRODUCE?

2. HOW SHOULD WE PRODUCE IT?

3. FOR WHOM SHOULD WE PRODUCE IT?

agosto 23, 2015 J. Michael McGuire 18


How Does The Market
Economy Answer The Three
Questions?

(Use The Circular Flow Model To


Answer)

agosto 23, 2015 J. Michael McGuire 19


A Catholic Framework for
Economic Life
• Blackboard

agosto 23, 2015 J. Michael McGuire 20


Evaluate the way of allocating
resources
One page.
Give at least one “pro” and one
“con” for each question.

agosto 23, 2015 J. Michael McGuire 21


SUMMARY
• “Economic System”
• Market Types
• Main Economic Agents
• G&S
–Consumers Demand
–Businesses Supply
• Resources
–Businesses Demand
–Consumers Supply

agosto 23, 2015 J. Michael McGuire 22

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