Circular Flow of Economics

Impact of 1 Person

One person's spending is other people's income. When consumers make purchases, goods and services are transferred from businesses to household in exchange for money payments. That money is used in turn by businesses to pay for natural resources, human resources and capital goods and to pay taxes.

Individuals in households may take their resources to market

(called the factor market, referring to the factors of production)and sell them; they may choose not to sell their resources (as in people who choose not to work for pay).

Individual Households:

In a market economy, resources are owned by the households; this includes natural, capital, and human resources and entrepreneurial skills.

Firms take the money from those sales to

order more for the business.

Circular Flow of Economics

A nation's overall levels of income, employment and prices are determined by the interaction of spending and production decisions made by all households, firms, gov't agencies and others in the economy.

The Gov't

Buys goods, services, and resources in order to produce certain goods and services.

Firms go to the factor market to

buy or hire the resources they need to produce goods and services

Tax on income and sales is collected by the gov't to

pay for gov't-provided goods and services (e.g., interstate highways, postal service).

The businesses buy more resources to

produce more and the money continues to flow through the economy.

Households generally receive income from

the sale of resources; they can spend this money or save it.

The circular flow model illustrates

the way in which resources, goods and services, and money flow among individuals, businesses, and governments in a market economy

Households may take their income

to the goods and services market to buy the things they want.