Hey everyone and welcome back to the channel. In this video we'll be looking at the circular flow diagram that you learned about at the beginning of your micro or macroeconomics course. With that said, let's get into it. So left completely blank, the circular flow diagram looks like this. There's four things that are happening and you'll notice that there's a set of arrows that are moving clockwise and there's a set of arrows that are moving counterclockwise.
Now the important thing to remember in the circular flow diagram is that we are looking at two groups of people. We're looking at firms and households. Firms are producers of goods and services, and households are the suppliers of the factors of production.
And so that leads to two markets. The factor market, which is also known as the resource market. This includes the four factors of production, so entrepreneurship, land, labor, and capital.
And then we have the product market, which is the products and services that are provided by firms. So in the circular flow diagram, you will notice that there's an arrow going in and out of each market. That is households give and take from both markets and so do firms.
Now, to help you distinguish between the factor or resource market and the product market, it's important to note who buys and sells which. So the factor market is where households sell the factors of production to firms and the firms buy the factors of production from households. The product market, on the other hand, is the goods and services or products that firms sell and households buy. Let's look at the top right arrow, the arrow leading into the factor market from households. Well, what factors do have to do with the factor market?
households provide for firms? Well, the factors of production and namely labor and capital, but this also includes land and entrepreneurship. This is supplied to firms from households. And so on the other side, what do firms receive from the factor market? Well, obviously the labor and capital being supplied by households.
But what about the arrow going the other direction? What do firms have to give to the factor market? Well, they have to pay for their cost of labor and capital or the cost of the factors of production.
And how do households receive these payments? payments? Well, in the form of wages and rents. So you'll notice that households are essentially selling labor and capital and receiving back wages and rents for this.
And firms are buying labor and capital and then therefore paying the costs of said labor and capital. But what about the product market? Well, firms give goods and services through the product market. Again, goods are being sold by the firms and therefore the households will be receiving those same goods and services. But what about the product market?
Well, the product market is a very But what about the green arrow? How does that fit in? Well, what do households give in exchange for their goods and services?
Well, their expenditure or consumption expenditure, meaning they're spending on goods and services. And how does this relate to what firms take in? Well, they take in revenues for all of the goods and services that are sold. So again, this circular flow diagram, you could look at the green arrow as the movement of money amongst these markets.
And you could look at the pink arrow as the movement of what is being bought or sold. Now, this does does get a little bit more intricate as you move on. You start to look at the foreign market, governments, and banks, but we'll be making a video on the circular flow of income a little bit later on, so be on the lookout for that video if it's something you're interested in.
Take a screenshot, put this in your notes, whatever you need to to remember this, and I hope you found the video helpful. If you did, let me know by liking the video, subscribing to the channel, and of course, let us know in the comments section what sort of economic topics you'd like to see us cover in the future. Thanks for watching this video, and we'll catch you in the next.