Circular Flow Model in Market Systems

Overview

• Circular Flow Model: Describes the movement of resources, goods, services, and money in a market system.
• Market System: Comprises two main types of markets:
  1. Resource Market
  2. Product Market

Resource Market

• Participants:
  • Sellers: Individuals/households who own resources (factors of production).
  • Buyers: Firms/businesses that purchase resources to use in production.
• Transaction: Resources are sold and purchased in this market.

Product Market

• Participants:
  • Sellers: Firms/businesses that produce goods and services.
  • Buyers: Individuals/households purchasing goods and services.
• Transaction: Goods and services are sold and purchased in this market.

Role Shifts

• Individuals: Sellers in the resource market, buyers in the product market.
• Firms: Buyers in the resource market, sellers in the product market.

Circular Flow Model Mechanics

• Continuous Flow:
  • Resources, goods, services, and money flow continuously in the system.
• Economic Agents:
  • Households and businesses are the main participants.
• Two Flows:
  • One flow in one direction and a balancing flow in the opposite direction.

Flow of Money

• Households:
  • Sell resources and receive income.
  • Use income to purchase goods/services, termed as household expenditure.
• Businesses:
  • Sell goods/services, receiving money termed as revenue.
  • Pay for resources, which are considered as business costs.

Summary

• The circular flow model illustrates the interconnectivity in a market system where resources, goods, services, and money circulate between households and businesses.
• The continuous flow involves concepts of income, expenditure, revenue, and costs, showing how different parts of the economy are linked.