Introduction
The easiest way to learn about the circular flow model is to realize in any economic system you serve two roles. The first role is that of a consumer. All of us use our money to purchase the goods and services we desire. The unique thing about the market economic system is that since freedom is such an important part, no two people will spend their money in the exact same way. Spend a day shopping at the mall and you are fulfilling your duty as a consumer.
The other role you have in our economic system is that of resource owner. Not all of us will own machinery or land, but everyone with a job provides labor. Businesses require four factors of production: land, labor, capital, and entrepreneurship. Therefore, businesses desire us because they need labor to produce goods and services. Businesses are willing to pay for your work and skills. We will learn later in the unit how you can get the businesses to pay you more.
For an easy illustration of the circular flow model, let us assume that you work at your local WalMart. Each week, you will receive a paycheck from the store. It is likely you will spend some of your paycheck at the store.
Following successful completion of this lesson, students will be able to...
- explain how both parties in a trade gain from voluntary exchange.
- draw a circular flow model of money, resources and products.
- explain the relationship between businesses and households in the product and resource markets.
The above objectives correspond with the Alabama Course of Study: Economics standards: 6, 6.1, and 6.2.