The Circular Flow

Going to focus on a basic economic concept that is fundamental to our study, Market Economics . A market is simply a place where buyers and sellers meet to engage in mutually beneficial exchanges with another. In a market economy there are two fundamental types of markets that must exist for mutually beneficial exchanges, in which households and firms engage in exchanges, in both resources markets and product markets, that Benefit both the firms and household themselves. This lesson is going to illustrate the flow of goods services, land labor capital and market economy between households and firms and seek to understand how the trades that take place in a market economy, so let's start off whit a couple of definitions here.

First let's at the household side of our graphs. We see that household possess three scare resources, in the case of land labor and capital these are all resources that exist in finite amounts in the world. Land resources are those that can be used to grow crops, to mine minerals, to catch fish, to log forest, all of the land resources. These are the resources, this is 5 any input into de production of a good or service that involves workers. We're talking about high-skilled workers, educated people an neucated act to the production or something is considered labor. Capital, this is the technology that is used to produces goods. Capital resources, also include things like Factory equipment, tractors for farmers, any sort of technology that is used in the production of good, Households are the owners of these scarce resources the land is held by either private individuals or households trough the public sector. Labor is workers that live at home and go to work at Factory or in and office every day, and capital, we provide capital to the marked economy through our savings of money. That will be explained a Little bit later on, when it comes to how firms acquire capital in the production of goods and service so there you see one side of the circular flow model of a market economy. We see that households possess three productive resources, land labor and capital, we must exchange these resources in the resource market.

So the first flow that we're going to illustrate in our circular flow is the flow of resources from households to firms in the resource market. Now, why do firms need resources? What are firms going to do with the resources that they get from households in the resource market? As we can see in the left side of our circular flow model, firms are established by entrepreneurs or individuals from households that wish to start business in order to make some money. Now, entrepreneurs and the firms that they run need resources in order to make some money. So, firms will wish to acquire resources from households that they can put these resources to use to make goods and services that they can sell back to households. So, the resource market is where the circular flow begins. Firms are buyers in a resource market; firms buy resources; households sell resources, and the resources that are being bought and sold are land, labor and capital. So, in the circular flow we should see resources flow from households to the resource market to firms. So they can be employed in the production of goods and services.

We also learned that in the world of scarce resources there is nothing free therefore, firms must give something up in order to acquire these three scarce resources, and that's where money comes into play. Money is what makes a circular flow function. Firms or the entrepreneurs to start the firm's must have money at their disposal in order to begin a business. With some money firms can exchange in the resource market for the land, labor and capital they need. So, in the other direction in our circular flow model, we're going to see money flowing from firms to households. Money of course, is what make the circular flow function. Households are providing land, labor and capital in the resource market, which are the factors of production. These are the things that firms need in order to make goods and services,  but in exchange for these things the firms are going to pay money to households. The money that firms pay to the households in the resource market, is income for households. For our labor households earn wages, for our land we earn rent, and for our capital we earn interest. These money incomes are the incentive that households have to provide land, labor and capital to firms in the resource market. Now, why do we care about money? Anybody who has ever been shopping knows why money is important. Money is what allows good and services that they demand in the product market. So now we´ve got half of our circular flow model made. We see that households resources in the form of land, labor and capital to entrepreneurs to the firms in the resources market. These act as factors of production for firm which they can use to make goods and services which they can sell us in the product market but nothing´s free in the market economy, so, of course, money has to flow in the other direction. Money in flowing from firms to households in the resource market. Where are we in the model, see the money has changed hands in the resource market. Households have earned money but what good is money if not to consume with? So what our households going to consume. This brings us to the product market with the factors of production, with the land, labor and capital that firms have acquired in the resource market. They can begin manufacturing or producing goods and services. So, we should start to see production occur in the market economy. So now, firms have lots of goods and services which they have produced using the resource acquired in the resource market of course, the reason for the production that firms have undertaken is to sell. A market economy is all about selling: Household sell resources in the resource market, and firms, sell goods and services in the product market. So, we should start to see these goods and services flow counterclockwise in the product market towards households , and that´s exactly what should happen next in product markets firms are the suppliers and household are the demanders, so firms sell and household buy products. Of course, nothing is free economy order to acquired these goods and services that they so demand. We can see goods flowing to households to firms. So that firms are earning the profits that they so desperately seek. We will see money flow from household to firms in the product market. So it´s a little bit difficult to see here but, what we should notice is that there are arrows indicating the flow of money, land, labor capital and goods and services a circular flow model that in this case, money is always flowing counterclockwise and resources goods and services are always flowing clockwise. The goal of firms and households in this model of the markt economy are very clear. Firms are profit seekers, so the goal of firmsis to maximize profits. To do this firms must sell their goods and services for more than they spent an resources. That ‘s the definition of a profit essentially. It’s when a firms total are greater than its total cost. In other words, it’s sold for more than it costs to produce.

And the goals of households what is the goal of households? The goal of households is to maximize utility. You may be unfamiliar witch this word utility but it has a simple definition in economics, and that is we’re going to simplify dramatically here, we’re going to say that happiness is achieved trough consumption of gods and services. So, recall a market is a place where buyers and sellers meet to engage in mutually beneficial exchanges. Look again at our resource market.

How do households benefit from providing land, labor and capital to firms in the resource market? Well, they do so because they are earning money incomes households of course are. Well they do so because they are coming money incomes. Households, of courses, are earning incomes in the form of wages, rents, interests and profits for the entrepreneurs who start the businesses. With these money incomes, households can ultimately acquire the gods and services that they demand in the product market. The good of any household is to earn a high enough money income to enjoy level of consumption of goods and services that improves the family standard of living. Now, let´s look at the product market. Firms, recall our seeking profits, the goal of firms should be to end up with more money that they started with their gods and services that they produced using the resources acquired in the resource market back to households. Hopefully for a profit, earning greater the firms incurred in costs. So, the beneficial nature of the market economy exists in so far, that households willingly supply their resources land, labor and capital, to firms with the ultimate goal of earning money incomes which can be used to buy goods and services, which provide households with a utility or happiness. Firms on the other hand, willingly provide goods and services to households in exchange for the money that they previously had paid those households in the resources markets. The goals are the maximize profits and to maximize utility. This is the essential nature of a market economy. Without these incentives, without these goals of households and firms, a market economy would simply not function and resource allocation would have to be understand by another mechanism altogether, such as government control or a command system of same.

Questions:

1.Market definition:

A market is simply a place where buyers and Sellers meet to engage in mutually beneficial exchanges with one another.

2.What types of markets exist in the market economy?

There are two fundamental types of markets; the Resources Markets and the Products Market.

3.What represent the firms and the households in the model of the circular flow?

The firms represent business companies in the model circular flow and the households represent families or consumers.

4.What explain/illustrate the circular flow economic model?

Illustrate the flow goods and services, land, labor, capital and money, and seek to understand how individuals stand to benefice from the trades that take place in a market economy.

5. Which ones are the scarce resources that belong to the households?

The three scarce resources are: land, labor and capital (these are resources that exist in finite amount in the world)

6. What is the meaning of "labor" in economy? Examples

This is workers that live at home and go to work at a factory or in and office every day. Builders or lawyers are some examples.

7. What is the meaning of "capital" in economy? Examples

We speak of "capital" when we provide money to the market economy through our saving. When we invest money, for instance

8. What is the meaning of "land" in economy?

The land resources that can be used to grow crops, to mine minerals, to catch fish, to log forest, etc.

9. How work the flow between the firms and household in the Resource Market?

We see that households possess three productive resources, land labor and capital, we must exchange these resources in the resource market.

The firms that they run need resources in order to make some money. Now, entrepreneurs and the firms that they run need resources in order to make some money. So firms will wish to acquire resources from households that they can put these resources to use to make goods and services that they can sell back to households. So the resource market is where the circular flows begins.

10. The factors of production are land labor and capital

these act as factors of production for firm which they can use to make goods and services which they can then sell us in the product market.

11. The money incomes of the households is called: income

For the labor they earn: wages

For the land they earn: rent

For the capital they earn: interest

12. What the households do with the money that they have earned in the Resource Market?

They do so because they are earning money incomes. Households, of course, are earning incomes in the form of wages, rents, interests and profits for the entrepreneurs who start the businesses. Wirth these money incomes, households can ultimately acquire the goods and serivces that they demand in the product market.

13. What happen in the product markets?

In product markets firms are the suppliers and households are the demanders, so firms sell and households buy products. Of course, nothing is free in a market economy in order to acquire these goods and services that they so demand. We can see goods flowing to households, but that doesn't come free, money must change hands. Money must flow clockwise from households to firms. So, that firms are earning the profits that they so desperately seek.

14. What is the goal of Firms and Households in the Market economy?

The families act as claimants of said products and, exchange they must deliver to the companies money that represents the price of side articles.

15-What means “profits”?

Is a term used to designate the benefits obtained from a process or economic activity.