Circular Flow Diagram

Key terms to understand

• Products: Items consumers (who live in households) purchase

• Examples of products: – GOODS: clothes, shoes, gas, food,

telephones, computers, televisions, – SERVICES: entertainment, legal services,

cleaning services, accounting services• Products are sold in a product market

Factors of Production (resources)• Land: All natural resources

– Soil, oil, coal, livestock, fish, trees• *Money paid for land is RENT

• Labor: All work, physical and mental• *Money paid for labor is WAGES

• Capital: Goods used to produce products– Truck, hammer, saw, oil rig

• *Money paid for capital is INTEREST (often borrowed)

• Entrepreneurship: The organization of a business, using land, labor, and capital

• *Money paid for entrepreneurship is PROFIT

Consumers

(Households)

Producers

(Businesses)

Consumers

(Households)

Producers

(Businesses)

A market is anything that

brings together buyers and sellers

Consumers

(Households)

Producers

(Businesses)

Product Market

(goods/services)

Consumers

(Households)

Producers

(Businesses)

Product Market

(goods/services)

Factor Market

(resource market)

(land, labor, capital, entrepreneurs)

Consumers

(Households)

Producers

(Businesses)

Product Market

(goods/services)

Resource Market

(land, labor, capital, entrepreneurs)

Get a job!

Consumers

(Households)

Producers

(Businesses)

Product Market

(goods/services)

Resource Market

(land, labor, capital, entrepreneurs)

Get a job!

Hire you!

Consumers

(Households)

Producers

(Businesses)

Product Market

(goods/services)

Factor Market

(land, labor, capital, entrepreneurs)

Get a job!

Hire you! Make

stuff!

Consumers

(Households)

Producers

(Businesses)

Product Market

(goods/services)

Factor Market

(land, labor, capital, entrepreneurs)

Get a job!

Hire you! Make

stuff!

Buy stuff!

Consumers

(Households)

Producers

(Businesses)

Product Market

(goods/services)

Factor Market

(land, labor, capital, entrepreneurs)

Get a job!

Hire you! Make

stuff!

Buy stuff!

Spend $!

Consumers

(Households)

Producers

(Businesses)

Product Market

(goods/services)

Factor Market

(land, labor, capital, entrepreneurs)

Get a job!

Hire you! Make

stuff!

Buy stuff!

Spend $!

Revenue$

Consumers

(Households)

Producers

(Businesses)

Product Market

(goods/services)

Factor Market

(land, labor, capital, entrepreneurs)

Get a job!

Hire you! Make

stuff!

Buy stuff!

Pay You! $

Spend $!

Revenue$

Consumers

(Households)

Producers

(Businesses)

Product Market

(goods/services)

Factor Market

(land, labor, capital, entrepreneurs)

Get a job!

Hire youMake stuff!

Buy stuff!

Pay You! $

Get Paid! $

Spend $!

Revenue$

Consumers

(Households)

Producers

(Businesses)

Product Market

(goods/services)

Factor Market

(land, labor, capital, entrepreneurs)

Get a job!

Hire you! Make stuff!

(goods and services)

Buy stuff! (goods and services)

Pay You! $ wages

Get Paid! $

Spend $!

Revenue$

All parts of the circular flow diagram are

dependent on all other parts!

Things to remember

• STUFF (land, labor, capital, goods, services) and MONEY (wages, rent, interest, purchasing $) flow in opposite directions

Production Possibilities

Frontiers

Production Possibilities Frontier

(PPF/PPC)

Capital Goods (Robots)

Consumer Goods (Pizza)

Production Possibilities Frontier

(PPF/PPC)

Capital Goods (Robots)

Consumer Goods (Pizza)

• Scarcity – unlimited wants, limited resources

100

50

Production Possibilities Frontier

(PPF/PPC)

Capital Goods (Robots)

Consumer Goods (Pizza)

• Scarcity – unlimited wants, limited resources

100

50

Production Possibilities Frontier

(PPF/PPC)

Capital Goods (Robots)

Consumer Goods (Pizza)

• Scarcity – unlimited wants, limited resources

• Opportunity costs and trade-offs

100

50

a

b.

Production Possibilities Frontier

(PPF/PPC)

Capital Goods (Robots)

Consumer Goods (Pizza)

• Scarcity – unlimited wants, limited resources

• Opportunity costs and trade-offs

100

50

90

25

50

45

a

b.

Production Possibilities Frontier

(PPF/PPC)

Capital Goods (Robots)

Consumer Goods (Pizza)

• Scarcity – unlimited wants, limited resources

• Opportunity costs and trade-offs

100

50

90

25

50

45

a

b

Cost = 40 pizzas

Benefit = 20 robots

.

Production Possibilities Frontier

(PPF/PPC)

Capital Goods (Robots)

Consumer Goods (Pizza)

• Scarcity – unlimited wants, limited resources

• Opportunity costs and trade-offs

• Efficiency – two kinds

• Productive: producing at the least cost (any pt. on the PPF)

• Allocative: producing the goods and services most wanted by society (a particular pt. on the PPF)

100

50

90

25

50

45

a

b

Cost = 40 pizzas

Benefit = 20 robots

.

Production Possibilities Frontier

(PPF/PPC)

Capital Goods (Robots)

Consumer Goods (Pizza)

• Scarcity – unlimited wants, limited resources

• Opportunity costs and trade-offs

• Efficiency – two kinds

• Productive: producing at the least cost (any pt. on the PPF)

• Allocative: producing the goods and services most wanted by society (a particular pt. on the PPF)

100

50

90

25

50

45

a

b

Cost = 40 pizzas

Benefit = 20 robots

c

Inefficient – unemployed resources

.

Production Possibilities Frontier

(PPF/PPC)

Capital Goods (Robots)

Consumer Goods (Pizza)

• Scarcity – unlimited wants, limited resources

• Opportunity costs and trade-offs

• Efficiency – two kinds

• Productive: producing at the least cost (any pt. on the PPF)

• Allocative: producing the goods and services most wanted by society (a particular pt. on the PPF)

100

50

90

25

50

45

a

b

Cost = 40 pizzas

Benefit = 20 robots

cpolicy

Inefficient – unemployed resources

.

Production Possibilities Frontier

(PPF/PPC)

Capital Goods (Robots)

Consumer Goods (Pizza)

• Scarcity – unlimited wants, limited resources

• Opportunity costs and trade-offs

• Efficiency – two kinds

• Productive: producing at the least cost (any pt. on the PPF)

• Allocative: producing the goods and services most wanted by society (a particular pt. on the PPF)

100

50

90

25

50

45

a

b

Cost = 40 pizzas

Benefit = 20 robots

cpolicy

Inefficient – unemployed resources

d

.

Production Possibilities Frontier

(PPF/PPC)

Capital Goods (Robots)

Consumer Goods (Pizza)

• Scarcity – unlimited wants, limited resources

• Opportunity costs and trade-offs

• Efficiency – two kinds

• Productive: producing at the least cost (any pt. on the PPF)

• Allocative: producing the goods and services most wanted by society (a particular pt. on the PPF)

100

50

90

25

50

45

a

b

Cost = 40 pizzas

Benefit = 20 robots

cpolicy

Inefficient – unemployed resources

d Unattainable with current resources and technology

.

Production Possibilities Frontier

(PPF/PPC)

Capital Goods (Robots)

Consumer Goods (Pizza)

• Scarcity – unlimited wants, limited resources

• Opportunity costs and trade-offs

• Efficiency – two kinds

• Productive: producing at the least cost (any pt. on the PPF)

• Allocative: producing the goods and services most wanted by society (a particular pt. on the PPF)

100

50

90

25

50

45

a

b

Cost = 40 pizzas

Benefit = 20 robots

cpolicy

Inefficient – unemployed resources

d Unattainable with current resources and technology

.

Production Possibilities Frontier

(PPF/PPC)

Capital Goods (Robots)

Consumer Goods (Pizza)

• Scarcity – unlimited wants, limited resources

• Opportunity costs and trade-offs

• Efficiency – two kinds

• Productive: producing at the least cost (any pt. on the PPF)

• Allocative: producing the goods and services most wanted by society (a particular pt. on the PPF)

100

50

90

25

50

45

a

b

Cost = 40 pizzas

Benefit = 20 robots

cpolicy

Inefficient – unemployed resources

d Unattainable with current resources and technology

Economic Growth

.

• Economic Growth = SOL

Increased quality of human resources (EDUCATION) or technology (INVESTMENT)

Production Possibilities Frontier

(PPF/PPC)

Capital Goods (Robots)

Consumer Goods (Pizza)

• Scarcity – unlimited wants, limited resources

• Opportunity costs and trade-offs

• Efficiency – two kinds

• Productive: producing at the least cost (any pt. on the PPF)

• Allocative: producing the goods and services most wanted by society (a particular pt. on the PPF)

100

50

90

25

50

45

a

b

Cost = 40 pizzas

Benefit = 20 robots

cpolicy

Inefficient – unemployed resources

d Unattainable with current resources and technology

Economic Growth

U.S.

Developing nation

• Economic Growth = SOL

Increased quality of human resources (EDUCATION) or technology (INVESTMENT)

Production Possibilities Frontier

(PPF/PPC)

Capital Goods (Robots)

Consumer Goods (Pizza)

• Scarcity – unlimited wants, limited resources

• Opportunity costs and trade-offs

• Efficiency – two kinds

• Productive: producing at the least cost (any pt. on the PPF)

• Allocative: producing the goods and services most wanted by society (a particular pt. on the PPF)

100

50

90

25

50

45

a

b

Cost = 40 pizzas

Benefit = 20 robots

cpolicy

Inefficient – unemployed resources

d Unattainable with current resources and technology

Economic Growth

NOW

FUTURE

U.S.

Developing nation

• Economic Growth = SOL

Increased quality of human resources (EDUCATION) or technology (INVESTMENT)

Production Possibilities Frontier

(PPF/PPC)

Capital Goods (Robots)

Consumer Goods (Pizza)

• Scarcity – unlimited wants, limited resources

• Opportunity costs and trade-offs

• Efficiency – two kinds

• Productive: producing at the least cost (any pt. on the PPF)

• Allocative: producing the goods and services most wanted by society (a particular pt. on the PPF)

100

50

90

25

50

45

a

b

Cost = 40 pizzas

Benefit = 20 robots

cpolicy

Inefficient – unemployed resources

d Unattainable with current resources and technology

Economic Growth

NOW

FUTURE

U.S.

Developing nation

• Economic Growth = SOL

Increased quality of human resources (EDUCATION) or technology (INVESTMENT)

Economic Interdependence

Production Possibilities Frontier

(PPF/PPC)

Capital Goods (Robots)

Consumer Goods (Pizza)

• Scarcity – unlimited wants, limited resources

• Opportunity costs and trade-offs

• Efficiency – two kinds

• Productive: producing at the least cost (any pt. on the PPF)

• Allocative: producing the goods and services most wanted by society (a particular pt. on the PPF)

100

50

90

25

50

45

a

b

Cost = 40 pizzas

Benefit = 20 robots

cpolicy

Inefficient – unemployed resources

d Unattainable with current resources and technology

Economic Growth

NOW

FUTURE

U.S.

Developing nation

Investment = purchase of capital goods

• Economic Growth = SOL

Increased quality of human resources (EDUCATION) or technology (INVESTMENT)

Economic Interdependence

The End