Hello everyone, this video introduces you to the circular flow model that comes in market systems. In market system there are two major types of market. One is resource market. What happens in resource market is resources or inputs or we also call them as factors of production they are being transacted in other words sold and purchased.
So who are the sellers? Individuals own the resources in the market system. So they are the sellers in the market system, resource market, sorry.
And they are going to sell those resources to the firms or businesses who actually use those resources. So buyers are firms or businesses. Second market is the product market.
In the product market where the goods and services are sold and purchased, who produces goods? Firms produces goods. because they produce the goods, they become the sellers in the product market. Whereas individuals or households purchase those goods and services, so they are the buyers in the product market. As you can see, moving from resource market to product market, the role of individuals and buyers is actually changing.
In one market, individuals are seller. You move to the other market, individuals becomes buyers. Same thing with the firms. Resource market firms are buyers and you move to the product market, firms become sellers in that. That actually creates flow of resources, goods and services.
And the third thing that comes is including the money. That's what we call it as circular flow model. So essentially market system creates continuous flow of resources, goods and services and money. That's what we show it in terms of flow chart. So how does this work?
To show the circular flow model, first we start with ourselves, which is households, which is one of the economic agents as a participant. Second thing comes businesses. Connecting households and businesses is one is resource market and the second one is product market.
So there are things that are going to flow in this particular order. So that means one flow. goes in one direction. To balance that, there is a second flow that goes in the opposite direction, as you can see in terms of arrows here. So what is flowing on these arrows?
Let's start with households. Households are sellers in the resource market. They are selling resources.
By selling resources, they have to receive something. That means you are working, you are using your labor. By using your labor, you are receiving money. there is a name for that money.
That's what we call it as income. We make income as a household in the resource market. We use that income and go to the product market and spend that money. Why do we spend the money?
Because we need to purchase goods and services. When you spend the money, name of the money changes. Now we call that one as expenditure or household expenditure. Now if you're purchasing those goods and services, Those are sold by the businesses.
Those goods and services are coming from the businesses being sold in the product market. In return, they are actually receiving money. The money received by the businesses, we call it as revenue.
Now, to produce those goods and services, businesses or firms actually need resources. Those resources are coming from the resource market. In return, businesses have to... pay for those resources. That's what we call it as business costs.
Okay, so we'll see in another chapter about business costs. What is happening in market system is there is continuous flow of resources, continuous flow of goods and services, and continuous flow of money going as income, expenditure, revenue, and costs.