• Document: Lesson 10 - The Circular Flow of Economic Activity
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Lesson 10 - The Circular Flow of Economic Activity INTRODUCTION CONCEPTS Economics Circular flow of goods, services, productive The circular flow of economic activity is a sim- resources and money payments plified macroeconomic model of the basic eco- Interdependence nomic relationships in a market economy. This Productive resources model gives the students an overview of how (natural, human and capital) households, businesses and government inter- Resource payments act in different markets by exchanging goods (wages and salaries, rent, interest, profit) and services, productive resources (also known as inputs or the factors of production) and CONTENT STANDARDS money. 7. Markets exist when buyers and sellers interact. This interaction determines mar- Reasoning ket prices and thereby allocates scarce People respond to incentives. Households have goods and services. incentives to provide resources to businesses to receive income in return. They then have 16. There is an economic role for government incentives to use their income to purchase to play in a market economy whenever the goods and services to satisfy their wants. benefits of a government policy outweigh Businesses have incentives to earn profits and, its costs. Governments often provide for therefore, to produce the goods and services national defense, address environmental that consumers want. To produce goods and concerns, define and protect property services, businesses need to purchase rights, and attempt to make markets more resources from households. The circular-flow competitive. Most government policies also model and the simulation in this lesson redistribute income. demonstrate these important relationships. 18. A nationÕs overall levels of income, employ- ment and prices are determined by the interaction of spending and production decisions made by all households, firms, government agencies and others in the economy. OBJECTIVES Students will 1. Identify and describe the three types of productive resources (inputs) and the kind of income each resource earns. 2. Analyze the economic relationships between households and businesses in a market economy. 3. Use a circular-flow diagram to illustrate the economic relationships among house- holds, businesses and government. ECONOMICS IN ACTION, © NATIONAL COUNCIL ON ECONOMIC EDUCATION, NEW YORK, N.Y. 85 LESSON 10 - THE CIRCULAR FLOW OF ECONOMIC ACTIVITY LESSON DESCRIPTION so you can put them in an envelope or con- In this lesson, the students read about market tainer to make it easy to give them out. interactions and participate in a simulation. ÒEconolandÓ involves transactions between 6. A copy of Activity 10.5 and Activity 10.6 businesses and households in two kinds of for each student markets: product markets and resource (or input) markets. They discuss how the govern- 7. A large piece of paper on which you have ment fits into this model and translate their written ECONO FACTORY conclusions into a circular-flow diagram. 8. Masking tape or straight pins so the stu- TIME REQUIRED dents can wear the Business Badges 75 minutes: 45 minutes to conduct and discuss

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