Circular Flow of the Economy

Balancing Our Economy

Learning the basics:

One of the main basic economic models is the circular-flow model, which describes the flow of money and products throughout the economy in a very simplified way. The model represents all of the actors in an economy as either households or firms (companies), and it divides markets into two categories:
  • markets for goods and services
  • markets for factors of production (factor markets)
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The primary economic function of households is to supply domestic firms with needed factors of production - land, human capital, real capital and enterprise. The factors are supplied by factor owners in return for a reward. Land is supplied by landowners, human capitalby labour, real capital by capital owners (capitalists) and enterprise is provided by entrepreneurs. Entrepreneurs combine the other three factors, and bear the risks associated with production.

Product Market:

What is a product market?

The marketplace in which a final good or service is bought and sold. A product market does not include trading in raw or other intermediate materials, and instead focuses on finished goods purchased by consumers, business, the public sectors and foreign buyers.

They are the markets where households acquire finished (consumer) goods and services. The markets are most familiar with retail markets.

A few examples would be:

  • Wal-Mart
  • Gas Stations
  • Burger King
  • Best Buy

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Businesses produce and supply goods and services to the households. The demand resources for production; land, capital, and entrepreneurs.

Factor Market:

Factor markets are the markets where business acquire the factors of production (land, labor, capital, etc.) When you are looking for a job you are in the factor (labor) market.

A few examples would be:

  • The Cowan Equipment
  • IBM Business Solutions
  • Snelling Personnel

• Made by Aubree and Heather •