hey this is Jacob Clifford welcome to ac/dc econ today I'm going to show you something that's all around you that most people don't even see it's called the matrix and you're inside it right now the circular flow matrix or model shows how products resources and money flow in the economy now look at your surroundings seriously take a moment and look around you The Matrix is everywhere it is all around us even though in this very room in a market economy there's households which is just people like you and me and there's also businesses now businesses sell goods and services to the households in something called the product market it's not like just one place it's any where things are sold like online or the mall the street corner anywhere you can buy stuff the computer or phone in front of you right now is a great example I mean you didn't produce that a business did and they sold it to you in the product market the same thing applies to your chair or pencil or the book over there everything around you but to make those goods and services businesses need resources like workers and machines in the free market households own the resources and they're sold to the businesses in the resource market economists point out that there's four categories of resources or four factors of production the first one is land which is any natural resource or anything that comes from Mother Nature then there's labour then capital which is tools and machines and finally someone to bring it all together the entrepreneur that's why it's called the circular flow matrix those resources are being used by the business to Bruce the products that people turn around and go by now what about money well it goes the other direction when you buy your phone in the product market you had to pay them money that's called consumer spending now that money makes its way to the businesses and they call it revenue but the business doesn't get to keep all that money they got to pay for resources and that's called the cost of production it's being paid the engineers that develop the phone those engineers earned income economists break down income and for different types and go along with each of the four factors of production they're called factor payments when you sell land you earn rent when you sell labor you earn wages for capital you get interest and for entrepreneurship you get profit so this is it the circular flow matrix that shows how a market economy works now let me ask you a few questions and see if you really understand the matrix first question is your local mall an example the product market or the resource market it's both some people are there to buy products in the product market but there's some people who are working or trying to get a job and that's a resource market so products resources and money are all being exchanged okay next question do businesses demand or supply the answer is both they demand in the resource market but they supply in the product market households on the other hand demand in the product market and they supply in the resource market so both businesses and households are supply and demanding so far this model is showing the private sector with just households and businesses but there's a bunch of important things missing like national defense schools and roads those things aren't produced by businesses so let's add in the government and the public sector the size and role the government and economy depends on a country's economic system but in most market economies the government still plays a role first the government buys goods and services from businesses in the product market for example fire trucks and just like households they pay for them that's called government spending the government also buys resources in the resource market like teachers and firefighters again it pays for those resources which is again called government spending the government then turns around and provides public goods and services like fire protection schools roads and bridges to businesses and households the government also pays money to businesses called subsidies or households called welfare economists call those transfer payments there are situations when the government's giving out money but not for goods and services if to meet some other objective like to alleviate poverty or get companies to produce more fuel-efficient cars but how does the government afford to provide public goods and welfare and subsidies well they tax businesses and households income taxes and sales taxes fund government projects and programs now there's several things still missing from this matrix including a financial sector where money isn't spent it's saved and then loaned out and also the role of other countries with exports and imports but for now this diagram gives you a pretty good idea of how to modern economy works one final thought in the movie The Matrix enslaves people you are a slave neo like everyone else you were born into bondage many people wonder if capitalism in this hamster wheel of constantly spending earning and spending and earning enslaves people now would your life be better off when you hold a thorough and just lived out in the woods I don't know but what I do know is there's a lot of things you'd have to live without first there'd be no cell phones or computers so say goodbye to YouTube and also there'd be no modern medicine or hospitals it would be nice if none of us had to work but there's a trade-off to that so does the matrix enslave us or liberate us let me know in the comments below I its watching til next time next video more videos subscribe and leave a comment