Circular Flow


What is Circular Flow?

Circular flow is the movement of money and products in a non ending circle between 4 things; firms, product market, households and the resource market. They all depend on eachother and the flow of money is goes clockwise while the flow of resources and products go counter clockwise. The circular flow model without government interference doesn't really start anywhere specific which explains it's circular shape.

When the government is involved a new aspect is added to the market. firstly it changes from a Free Market to a Open Economy. The government gives out transfer payments to households and subsidies to firms while collecting taxes from both. Also directly to the resource market the government has expenditures and receive land, labor, capitol, and rent. ability. While in the product market they have more expenditures and receive goods and services.

Housholds: P1010026.JPG

Households range for people who live alone to extended families in which several adults and children share a home.

They supply resources to resource markets in exchange of income and they spend that income on their demand for goods & services. their resources are more often their labor, land and capital ability like stocks.


The Resource market:

The resource market uses the resources bought from households to create products which are then later on sold to the firms. The resource market pays housolds for their labor and then sells their resources to firms to be sold.

An example of a resource market is a factory.

1159874533_6395c54c99_b.jpgThe Product market:

The product market is where households buy their things from with the money gained from the resource market. It is where the final product that was bought from the resource market is sold.

An example of a product market is any store like Walmart or Macy's.

Firms are in between the resource market and the product market. They are in charge of buying resources from the resource market and then selling goods to the product market where it will later on be sold.They create goods from the resources which they will later on sell to firms in exchange to for income.
An example of a firm is Gillette Fusion Power.

A video explaining Circular Flow

Articles which display the circular flow in action


This article discusses how car sales were very high this past President’s Day. According to the article, this holiday is “like the Super Bowl” for car dealers. Ann Regan, a Ford dealer, commented that this increase in sales is due to consumers having a “better attitude”. The economy has begun to pick up, giving consumers more money to spend on new goods and services. Now, people who had kept their old cars during bad economic times are in the market to buy new cars. This increase in sales represents many goods being purchased in the product market of the Circular Flow model. In the product market, buyers sell goods that households buy. This increase in car sales contributes to an increase in consumer expenditures, which leads to more revenue for the businesses. This, in turn, gives the business more money to spend in the resource market, which will continue the circular flow.


Abbott Laboratory and Circular Flow

Abbott Laboratory recently fired around 1, 900 employees in order to save money in the current recession. They are expected to save nearly $300 million annually. Even though this may help Abbott for a short time, it will disrupt the circular flow of the economy. Abbott is a major distributor in the product market as it provides many medicines and nutritious food for consumers. Since Abbott fired many people, it decreased the amount of resources it bought in the resource market since Abbot bought less labor. It also decreased its use of capital from the resource market because it did not buy new machines and chemicals for testing new drugs that it usually does. Since Abbott bought fewer resources from consumers, they will receive less pay since almost 2,000 people will not get their expected incomes. Since consumer are not getting paid due to Abbot’s decreased buying in the resources market, they will not buy as many of Abbot’s products in the product market. Especially Abbott’s nutritious food, since they can be expensive and are inferior goods. As consumers buy less in the product in the product market, Abbot will not get money from sales. They will also not be able to supply as much in the product market because they have less resources to use. With less money from sales, Abbot will have less money to use and buy resources, and the cycle starts over.