Understanding the Circular Flow Model in Economics

Circular Flow Model

Illustrates interactions in a market economy.

Market Economy

An economic system based on supply and demand.

Product Market

Where households buy goods and services.

Factor Market

Where households sell production resources to businesses.

Goods and Services

Products offered for sale in the economy.

Households

Consumers who purchase goods and services.

Businesses

Producers that sell goods and services to households.

Factors of Production

Resources like land, labor, and capital.

Wages

Payments to workers for their labor.

Rent

Payment for the use of land.

Profits

Earnings businesses make after expenses.

Raw Good Producers

Extract natural resources for production.

Middlemen

Distributors who transport goods to retailers.

Retailers

Sellers that provide goods directly to consumers.

Demand

Consumer desire for goods and services.

Economic Stimulus

Continuous flow of money and resources.

Example of Farmers

Producers of raw goods like crops.

Example of Truck Drivers

Middlemen who distribute goods.

Example of Walmart

Retailer selling directly to consumers.