Welker’s Wikinomics​ practice activities
1.0 Introduction to Economics
The Circular Flow
Directions: ​Answer the questions below
1. Identify the missing components of the circular flow model above.
A. Land, Labor, Capital, Entrepreneurship
B. Wage, Interest, Profit, Rent (WIRP)
C. Goods and Services
D. Money expenditures and revenues for firms
2. In the resource market:
a. What is the role of firms?
Employ resources from households
b. What is the households?
Provide resources for firms in exchange for income
3. In the product market:
a. What is the role of firms?
Welker’s Wikinomics​ practice activities
Produce goods and services and sell them to households
b. What is the role of households?
Buy goods and services produced by firms
4. Give three examples of resource markets:
1. The cotton market
2. The market for international school teachers
3. The market for oil
5. Give three examples of product markets:
1. The market for private school education
2. The market for new cars
3. The market for airline tickets between Zurich and London
6. What determines the amount of income a household will earn in the resource market?
Why do some households earn higher incomes than others?
The value of an individual’s labor, land or capital determines the income he or she
earns in the resource market. Households with lots of skills will earn higher wages
than those who have less skills. Households who own property will earn more rents,
and households with money in the bank will earn more interest income than those with
little in terms of capital.
7. What determines the amount of money a firm will earn in the product market? Why do
some firms earn so much more money than others in a market economy?
The quality and the quantity of the products the firms produce and the consumers’
willingness to buy the goods determined a firm’s revenues in the product market.
Some firm earn more revenues than others because they are more successful at
meeting the demands of consumers.
8. What is the goal of a household in a market economy? Based on this simple goal, what
is the best way for a household to achieve it?
The goal of households is to maximize their utility, which can best be achieved by
earning as much income as possible in the resource market to as to increase
consumption of goods and services in the product market.
9. What is the goal of a firm in a market economy? How can a firm best achieve this goal?
The goal of firms in a market economy is to maximize their profits. This can best be
achieved by minimizing costs in the resource market and maximizing revenues in the
product market.
Welker’s Wikinomics​ practice activities
10. What makes the exchanges that take place in a market economy “mutually beneficial”?
In order to achieve their goals (utility and profit maximization), both households and
firms depend on one another, and can benefit one another in their pursuit of these
goals. Households must provide firms with resources in order to earn incomes, and
firms must provide households with goods and services in order to earn revenues and
profits.
11. What role does money play in the circular flow model?
Without money the exchanges between households and firms would be nearly
impossible. A “barter” system is simply far less efficient than a system that has money
to facilitate exchanges. Money is a medium of exchange.
12. What role do prices play in the circular flow model?
Prices act as SIGNALS of the relative value of a resource, good or service. If the price
of one type of labor increases (the wage), more households will wish to go into that
field of work. If the price of a particular good increases, more firms will start making
that good. In this way, resources are allocated towards the production of different
goods or provision of different types of labor based on the signals prices send from
buyers to sellers and vice versa.
13. What role or roles do you think the government should play in a free market economy?
In a “free” market economy, government should play very little role. Perhaps
establishing and enforcing laws that assure that individuals are not exploited or
harmed, protecting property rights, and providing some of the good that the market is
not good at providing (defense, roads, schools, etc). This should be the extent of
government intervention in a “free” market economy.
14. What would happen to the circular flow of a nation’s economy if the nation opened up to
free, international trade with the rest of the world?
It could either grow or shrink, since the country could sell some of its output to
foreigners (meaning there would be more households demanding goods and services,
growing the total flow of income), or the country could buy more imports from abroad
(meaning there would be less demand for the nation’s output as households demand
more foreign goods and services, reducing the flow of income)