APMacro: Circular Flow Model


Circular Flow Earnig a Living

The market economy has two groups of decision makers: households and businesses. It also has two broad markets: the resource market and the product market.

The upper half of the diagram represents the resource market. The resource market is the place where resources or the services of resource suppliers are bought and sold. In the resource market, households sell resources and businesses buy them. Households own all economic resources either directly as workers or entrepreneurs or indirectly through their ownership of business corporations. They sell their resources to businesses, which buy them because they are necessary for producing goods and services. The funds that businesses pay for resources are costs to businesses, but are flows of wage, rent, interest, and profit income to the households. Resources therefore flow from households to businesses, and money flows from businesses to households.

The lower part of the diagram represents the product market. The product market is the place where goods and services produced by businesses are bought and sold. In the product market, businesses combine the resources they have obtained to produce and sell goods and services. Households use the income they have received from the sale of resources to buy goods and services. The monetary flow of consumer spending on goods and services yields sales revenues for businesses.

The circular flow model suggests a complex inter-related web of decision making and economic activity involving businesses and households. Businesses and households are both buyers and sellers. Businesses buys resources and sell products. Households buy products and sell resources. As shown in the diagram, there is a counterclockwise real flow of economic resources and finished goods and services, and a clockwise money flow of income and consumption expenditures. These flows are simultaneous and repetitive.


Homework:
1. APMacro – Read Chapter 2 pp.29-41 – due Monday 2/1

Arrows-02-june

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APMacro: Economic Perspective


scarcity

People’s economic wants are numerous and varied. Humans need air, water, clothing, and shelter. But in contemporary society, we also seek the many goods and services that provide a comfortable or affluent standard of living. Society has productive resources: labor, tools and machinery, land and mineral deposits, that are used to produce goods and services. This production satisfies many of our economic wants and occurs through the organizational mechanism called the economic system or the economy. However, our economic wants exceed the productive capacity of our limited or scarce resources. So the complete satisfaction of society’s economic wants is impossible. This truth underlies our definition of economics. It is the social science concerned with the efficient use of scarce resources to achieve the maximum satisfaction of economic wants.

From our definition of economics, it is easy to see why economists view the world through the lens of scarcity. Since human and property resources are scarce or limited, it follows that the goods and services we produce must also be limited. Scarcity limits our options and necessitates that we make choices. Because we can’t have it all, we must decide what we will have and what we must forgo. At the core of economics is the idea that “there is no such thing as a free lunch” (TINSTAAFL). You may get treated to lunch, making it free to you, but there is a cost to someone.Scarce inputs of land, equipment, farm labor, the labor of cooks and waiters, and managerial talent are required. Because these resources could be used in alternative production activities, they and the other goods and services they could have produced are sacrificed in making the lunch available. Economists call these sacrifices opportunity costs. To get more of one thing, you forgo the opportunity of getting something else. So the cost of that which you get is the value of that which is sacrificed to obtain it.

ppc-image015

The necessity and consequences of choices can best be understood through a production possibilities model. each point on the production possibilities curve represents some maximum output of two products. The curve is the frontier because it shows the limit of attainable outputs. To obtain the various combinations of the two products, society must achieve both full employment and productive efficiency. Points lying inside or to the left of the curve are also attainable, but they reflect inefficiency and therefore not as desirable as points on the curve. Points inside the curve imply that the economy could have more of both products if it achieved full employment and productive efficiency. Points lying outside or to the right of the production possibilities curve, would represent a greater output than the output of any point on the curve. Such points are unattainable with the current supplies of resources and technology.


Homework:
1. APMacro – Read Chapter 2 pp.29-41 – due Monday 2/1

Arrows-02-june

Semester 1 Ends


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Homework:
1. APMacro – Read Chapter 2 pp.29-41 – due Monday 2/1

15l

Semester Exams


Zits - finals

 

Period 6 and 7

Good luck!

 


Homework:
1. APMacro class: Read Chapter 2 pp.29-41 – due Monday (2/1)

15l

Semester Exam


rman

 

Period 5

Good luck!

 

 


Homework:
1. APMacro class: Read Chapter 2 pp.29-41 – due Monday (2/1)

15l

Semester Exams


Exam cartoon

 

Periods 3 and 4

Good luck!

 

 


Homework:
1. APMacro class: Read Chapter 2 pp.29-41 – due Monday (2/1)

15l

Semester Exams


lost-knowledge

 

Periods 1 and 2

Good luck!

 

 


Homework:
1. APMacro class: Read Chapter 2 pp.29-41 – due Monday (2/1)

15l