Unit 2, Lesson 1

resource market

factor market where households sell resources & businesses buy them

A good way to understand the cooperation between different elements of the economy is to

look at a circular flow diagram

how

means both how & why

circular flow

shows the connection between markets, government, firms, & households in an economy

financial market

the banking, stock & bond markets through which private savings & foreign lending flow to become investment, government, & foreign borrowing

A circular flow diagram shows

the flow of resources between the four main players in the economy (households, businesses, government, & rest of world)

The four main players interact in

three types of markets (factor, product, & financial) for the exchange of goods and services between buyers and sellers; it can refer to a place, like a store, or a particular product, like the market for peaches

explain

use words and/or pictures where appropriate

In a circular flow diagram,

all of the players & markets are interconnected & labeled to show how they relate to one another

show

include a graphic representation as appropriate

identify

requires a one- or two-word answer

factor market

resource market where households sell resources & businesses buy them

Details About Circular Flow Diagrams

A circular flow diagram shows us how money, resources, goods, & services flow between different parts of the economy Households provide resources in the form of land, labor, capital, & entrepreneurship to the factor/resource market; these resources (or factors of production) are used by firms to product goods & services; households consume some of the goods & services from the product market while other goods & services are exported to nations around the world Looking at the flow in the opposite direction, households consume goods & services from the product market, which provides revenue for businesses (revenue isn't the same as profit & firms don't earn profit); some of the goods & services purchased are imported from other nations; to produce the goods & services within the nation, firms incur costs as they purchase factors of production from the factor market; these costs are paid to the households who provide the resources in the form of income (rent, wages, interest, & profit) The government is also involved in the circular flow; it provides services such as student aid, road construction, & national security to households & firms in return for tax payments; the government also uses some of their tax revenue to purchase goods & services from the product market; when the government spends money, it's called expenditures Government, households, businesses, & the rest of the world interact in the financial market; households & the rest of the world put their extra funds in the financial market for which they receive interest; financial markets then loan that money out to businesses, government & the rest of the world for which they're paid higher interest; even households might borrow money from time to time; financial markets also facilitate transactions involving other financial assets like stocks, bonds, & securities When we put it all together, we get a fully operational economy

The Players

The government represents any lawmaking body (local, state, or national) that collects taxes and provides services to individuals & businesses Households include individuals like you and those living in the same home Businesses include any company type that earns income from the sale of goods and services The rest of the world represents interaction with all those three groups in foreign countries; this would be the international sector of the circular flow diagram

The Markets

The product market is the buying and selling of finished goods and services, like your morning latte The factor market is the exchange of the factors of production the resources necessary to create a good or service including components of land, labor, & capital, such as a coffee company purchasing equipment to process coffee beans The financial market refers to the stock market & banking services, including the loans all the other economic players use to meet their goals