ECONOMICS
How does the economy even work? I mean, I know that I get money and
buy stuff…but like…how do people keep getting more money and more
stuff? How does the stuff get to me and why do people make stuff? HOW
DOES THIS WORK!?
The Economy
•Households (Consumers) – These people have
the factors of production and want goods.
•Land, Labor, Capital, Entrepreneurs
•Firms (Businesses) – These need the factors of
production and produce goods.
Economic Sectors
• Market – A free and willing exchange of goods and
services.
• NOT A PLACE. IT COULD BE ANYWHERE.
• Factor Market – Markets where firms purchase the
factors of production from households.
• Product Market – Markets where households purchase
goods and services from firms.
Model Making
Hey!
We
You
can
have
them…………
want that
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Factor Market
for
a price.
cool
stuff!
Wecourse!
need those
Of
We
factors
just
needsotowe
be
can
make stuff!
compensated.
The
the
for
sell
their
finished
The Firms
Firms pay
make
a Households
profit
from
the
sale
then
get
the
factors
of of
The
Households
sell
their
factors
their
factors
the
form
of
goods
and
services
togain
the
and the
Households
utility from
production
they
need
to
create
production
ininthe
Factor
Market.
paychecks,
rent,
etc.
Households
in
theinterest,
Product
Market.
the finished
goods
and services.
goods
and services.
Households
$$$$$$
Firms
Product Market
$$$$$$
Factor Market
As is often the case in economics,
This
Circularworld,
Flow of Economic
In a model
perfect
model
this
does notthis
show
us awould
Activity
continues
as firms increase
allow for
infinite
growth.
perfect
picture
ofeconomic
the economy.
their profit and households increase
their
utilityour
from
finished goods
and
However,
limited.
It
does show
usresources
the ideasare
and
basic
services.
concepts.
Product Market
Wait, this is too simple…
•What is missing from this economic model?
•What else plays a massive role in the economy?
Model Making
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Factor Market
F
O
P
$
SUB
TAX
REG
TAX
ENT
G
S
T
A
X
$
Product Market
The
government
also
provides
funds
to and
Businesses
are
sometimes
given
subsidies
The
government
also
employs
citizens
Regulations
placed
on
many
$ $in$are
$ $also
$
The
The
government
government
collects
purchases
taxes
final
from
goods
firms,
and
households
the
form
of
entitlements
such
by
the
government
to
help
with
the
cost
of
provides
them
with
a
salary.
industries.
individuals,
services
from
and
the
the
product
sale of market.
finished
products.
as
welfare,
unemployment,
Social Security,
production.
The government and the free market participate simultaneously
and Medicare. in the economy.
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MORE COMPLEX THAN THAT
•The Foreign Sector – Represents all
the countries in the world.
Model Making
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Factor Market
F
O
P
$
Foreign
Sector
TheThe
United
States
alsoexports
exports its
Theto
US
profitsGoods
from exports
own
Finished
toMarkets
our
goods
foreign
Product
Consumers
toUS
other
nations.purchase
Product
Markets.
the foreign goods.
SUB
TAX
REG
TAX
ENT
G
S
$$$$$$
T
A
X
“Made in China”
$
Product Market
$$$$$$
Foreign Goods
US Exports
$ $ $$ $$ $$ $$ $ $
Create Your Own Model
•Draw a complete model of circular flow.
•Make it like, really good.
•Color it.
•Add descriptions.
•Add images and representations.
Circular Flow of Economic Activity
Directions: Illustrate the circular flow of economic activity and label all key players, actions, and movement of money,
factors, and goods.
Draw the Circular Flow Model in your notebook. Your illustration should correctly show the movement of factors,
money, and finished goods throughout the economy. Along with images, your model should include notes and
explanations for all of the following:







Households (Consumers)
Firms (Businesses)
Product Market
Factor Market
Factors of Production (Land, Labor,
Capital, Entrepreneur)
MONEY (Paychecks, interest, rent.)
Finished Goods








Government
Taxes
Subsidies (payments from the government)
Entitlements (Welfare programs)
Regulations
Foreign Markets
Export
Import
$$$$$$
$$$$$$
Factor Market
F
O
P
$
SUB
TAX
REG
TAX
ENT
G
S
$$$$$$
T
A
X
$
Product Market
$$$$$$
Foreign Goods
US Exports
$ $ $$ $$ $$ $$ $ $