lila economics

Real flows and Money flows

Money flows in the model are those that finance the flows of resources, goods and services. Firms pay households' incomes (Y) for the resources they supply. Households use this income to purchase the goods and services they desire from firms; this is termed consumption spending (C).

Each of the resources earns a reward or receives a payment from the firm which uses it. For example, natural resources earn rent, human resources earn wages, entrepreneurs earn profit, and capital resources earn interest.

As an economy grows (expands) it will influence the flows in the circular flow model. If consumers' demand for goods and services increases, then firms will require additional inputs (resources) to produce the increased output required. In turn, firms will pay households more for the inputs used and households' incomes will rise.

Questions – Circular Flow

1. What is the difference between a money flow and a real flow?

The money flow is the flow of income and spending between households and firms, while the real flow is the flow of goods and services and resources between households and firms

2. There are two groups that are part of a two-sector economy. Who are they?

The two groups are households and firms

3. What are the 4 factors of production?

Labour

Land

Capital

Entrepreneurial ability

4. Describe the term interdependent in the context of the circular flow.

The money flow and the real flow could not exist without both of the groups- households and firms as each provides income and resources to the other in exchange for goods and services and resources, which then continues the cycle. The two flows are interdependent because without money flow, real flow wouldn't exist, and without households, firms could not exist and vice versa.

Scarcity: When there is a limited amount of a given resource

Examples:

• A government works with a limited budget. The amount of money that it has is scarce.

• A state has a limited number of acres of free land to build upon. The amount of land is scarce.

• A teacher has one 90‐minute planning period. The amount of time is scarce.

Opportunity Cost: What you give up when you have to make a choice between two things.

Examples:

• I have $15.00 to spend. I decide to buy a baseball cap instead of a new DVD. The DVD represents the opportunity cost.

• A city government has $20,000 to spend. They decide to spend it on new job programs instead of on trash collection days. A clean environment is the opportunity cost.

Socioeconomic Goals: There are things that the government tries to achieve through how it spends money and resources.

Equity: Equality between people’s opportunities. This can be achieved in several

ways.

• Redistributing Income: Taking from the rich and giving to the poor.

• Fair Wages for Workers: Raising the minimum wage to account for inflation.

• Assistance for Homebuyers: Giving loans to people who are buying real estate if they can’t afford it.

• Equal Employment Rights: Making sure that people have equal opportunities to get and keep a job.

1. Scarcity- The idea that there is only a limited amount of resources available for use

2. Opportunity Cost- What is being lost when making an economic decision

3. Needs- Resources that are necessary for human survival

4. Wants- resources that aren't necessary for human survival but may improve quality of life

5. Goods- products/resources that are produced by businesses and can be bought

6. Services- a task or action that is done for a customer by a business in exchange for money

7. Economics- the idea that people can make decisions and choices with their money

8. Choice- a situation where someone would have to choose one option or the other

9. Economic Problem- a problem related to economics or money

10. Resources- materials that can be used as tools to create products

Capital

Natural

Entrepreneurial

Labour/Human

From research or readings – provide a definition and 3 examples of the following:

1. Economic Good- a good that has a benefit to society, and scarcity- which creates opportunity cost\

- A pair of shoes

- Cardboard boxes

- A mobile phone

2. Free Good- a good with no opportunity cost- it can be consumed in unlimited quantities

- Sunlight

- Air

- Sand

3. Durable Good- a good that does not wear out and has utility over time instead of being consumed in one use

- Cars

- Heavy machinery

- Kitchen appliances

4. Non-durable good- goods that are immediately consumed in one use, or goods that have a lifespan of less than 3 years

- Meat

- Gasoline

- Cosmetic products

5. Capital Good- tangible assets like buildings or machinery used to produce goods for a business- i.e durable goods that are used in the production process

- Machinery

- Automobiles

- Buildings

6. Consumer good- a good that is sold for consumption to a consumer

- Clothing

- Jewelry

- Food

7. Public Good- a good that every member of a society can use without reducing the availability of that good for all others

- Law enforcement

- Streetlights

- Clean air

8. Private Good- a good whose ownership is restricted to the individual that purchased the good

- Housing

- Food items

- Transport- plane tickets

9. Common Resources- any scarce resource that provides benefit to a society but is not owned by anyone in particular

- Water

- Forestry

- Pasture

10. Club Goods- goods that are not depleted by individual use but can temporarily become congested

- Internet

- Roads

- Public spaces like parks

1. What are the goals of the three economic systems?

Market:

To give consumers full economic freedom

Traditional:

To maintain cultural practices and be self-sustainable- to survive

Command:

To give the government full power over the market and economic decisions

Internal finance is generated inside the business and the main sources are retained profits from previous years after all deductions, sales of assets such as machinery and more effective use of capital (this may include chasing debtors and negotiating longer credit periods with suppliers)

External finance is generated outside the business, and the main sources are venture capital, loan capital, ordinary share capital, and personal funding.

Mark the first blank with the appropriate classification – A, L, OE, R, E

If you have identified an item as either an Asset or Liability, mark the second blank as “C” if the item is current.

A/L/OE/R/E C?

Car loan L

Software A

Wages expense E

Office furniture A

Long-term investments A

Inventory A

Small tools A

Accounts payable L

Retained earnings OE

Accounts receivable E

Property A

Repair revenue R

Maintenance expense E

Interest expense E

Salaries payable E

Subscription revenue R

Common shares A

Equipment A

Prepaid insurance E

Income tax expense E

Mortgage payable L

Cash A

Insurance expense E

Limited liability- when a company owes money and they are unable to pay it off, it's owner's personal assets are protected from being taken to pay it off

Capital- the money that a business makes

Private Company- a company that is solely owned by friends/relatives of an entrepreneur and does not sell shares to the general public

Public company- a company that allows the general public to buy shares and become partial owners of it

NZX- The New Zealand stock exchange- where the people of NZ can buy stock/shares

Debt Finance- businesses can get finances from borrowing money and paying it off over a period of time with added interest

Equity Finance- businesses can gain finance from selling parts of their company (also known as shares) to investors who rely on getting money back as the business makes more capital

Internal sources of finance- examples

Internal sources of finance are finance that is obtained from inside the company- e.g owner investment, retained profits

External sources of finance- examples

External sources of finance is finance that is obtained from outside of a company- e.g investors, loans from banks

Line of credit- a present unit of borrowing that can be used at any time- money the bank will give a business 'on demand'

Shares- parts of a company/partial ownership of a company that can be sold

Shareholder- a person who owns a share or multiple shares in a company

Separate legal entity- a company is a separate legal entity from its owners/shareholders meaning it can enter contracts, get sued, and own property separate from its owner.