Market System and Circular Flow Summary

Market System

  • Circular Flow Model: Visual representation of interactions in the market system.

  • Household Role: Households engage in buying products and resources (Options A and C).

Flows in the Market

  • Eight Flows between Businesses and Households:

    1. Costs (Businesses)

    2. Land, Labor, Capital, Entrepreneurship (Households)

    3. Rent, Wages, Interest, Profits (Businesses)

    4. Land, Labor, Capital, Entrepreneurship (Market Inputs)

    5. Goods and Services (Transactions)

    6. Consumption Expenditures (Households)

    7. Goods and Services (Output from Businesses)

    8. Revenues (Income for Businesses)

The Invisible Hand

  • Concept: When individuals act in their self-interest, society typically benefits (Option B).

Decisions in Market Operations

  • Dunkin Donuts Expansion:

    • New locations are opened when the marginal benefit (MB) exceeds the marginal cost (MC).

    • No new locations will be opened when MB is less than MC.

Competition Defined

  • Components of Competition:

    • Private property

    • Independent buyers and sellers in markets

    • Increasing opportunity costs

    • Capital goods and Labor