The Circular Flow Model Accompanied by Reverse Flows

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The Circular Flow Model Accompanied by Reverse Flows

The circular flow model is defined as the flow of resources from households to firms and of products to firms from households. These flows are accompanied by reverse flows of money from firms to households and from households to firms. The circular flow is comprised of the resource market, households, product market, businesses, and the government.

Macroeconomics - The study of the aggregate (total) Behavior of the whole economy.

Macroeconomics Aggregates:

- Unemployment rate: Percent of people in the labor force is not working but searching for work.

- Inflation rate: Percent rise in the average price of all goods and services.

- GDP: Dollar value of all final goods and services produced within a country in a given year; output

A Market is an institution or mechanism which brings together buyers (demanders) and sellers (suppliers) of particular goods and services.

The Forces of supply and demand - In the United States and in other free enterprise systems, the distribution of resources and products is determined by supply and demand. Demand is the number of goods and services that consumers are willing to buy at different prices at a specific time. A fundamental characterisic of demandis all else being constant, as prices fall, the quantity demanded rises. Vice versa all ther things remaining the same as price increases, the corresponding quanity demanded falls.

Supply - The number of products-goods and services that businesses are willing to sell at different prices at a specific time. As price increases, the corresponding quantity supplied increases; as prices fall, the quantity supplied also falls.

Equilibrium Price - The supply and demand curves intersect at the point where supply and demand are equal. The price at which the number of products that businesses are willing to supply equals the amount of products that consumers are willing to buy at a specific point in time.

The United States and the economy - The United States has the most powerful, diverse, and technological advanced economy in the world. Oriented economy, private individuals, and business firms make most of th decisions. Government purchases of goods and services are made predominantly in the marketplace. US business firms have greater flexibility than their counterparts i...

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...y the change in income. The marginal propensity to save, MPS is the ratio of change in saving to the change in income. The sum of MPC and MPS for any change in disposable income must always be one. As households save a portion of their income into the financial market, the financial market distributes to households interest accrued on the money saved. The financial market is a market that trades financial assets. Financial assets are the legal claims on the real assets in our economy including corporate stocks and bonds, government securities, and money. Without financial markets it would be impossible to accumulate the funds needed for investment in capital projects. Firms or businesses employ factors of production, which they obtain from households through the factor markets in exchange for factor payments. They use factors to produce goods and services, which are sold to households and the government sector through the goods and services markets. The revenue from these sales goes to households as factor payments or to the government as taxes. The government sector purchases output from firms through the goods and services markets, financing these purchases by tax collections.

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