This paper provides an equilibrium model of an open city economy with mobile firms and resident workers. Given household preferences and firm technologies. decisions of firms and households as they are affected by natural endowments, economic development across counties in the United States. . predictable relationships between amenities, quality of life and local economic performance. The circular flow of income or circular flow is a model of the economy in which the major Richard Stone further developed the concept for the United Nations (UN) and the in chapter 11, entitled "The Par or Relation between the Value of Land and Labor" to . The economy consists of two sectors: households and firms.
Reduced transportation costs 4. Facilitated use of machines. Kinds of Firms 1. A firm with a single owner who has the right to all profits and who bears unlimited liability for the firm's debts.
A firm with multiple owners who share the firm's profits and each of who bears unlimited liability for the firm's debts.
Economic Perspectives: The Circular Flow Diagram
A legal entity owned by stockholders whose liability is limited to the value of their stock. Household production still exists. Name some forms of household production that still exist. If a householder's opportunity cost of performing a task is below the market price of the task, then the householder usually performs that task.
Consider my decision to mow the lawn or pay someone else to do it. What is my next best alternative to mowing the lawn?
Chapter 4 Economic Decision-Makers: Households, Firms, Governments, and the Rest of the World
Preparing an extra hour isn't my next best alternative, because I'm well enough prepared, and I won't get any extra salary from over-preparing.
What would I do? What about a Dr. His next best alternative is working an extra hour. Household sector Government sector Financial sector. Each of the above sectors receives some payments from the other in lieu of goods and services which makes a regular flow of goods and physical services.
Money facilitates such an exchange smoothly.
Circular flow of income
A residual of each market comes in capital market as saving which in turn is invested in firms and government sector. Technically speaking, so long as lending is equal to the borrowing i. However, this job is done by financial institutions in the economy. Rest of the world sector: The five sector model of the circular flow of income is a more realistic representation of the economy.
Unlike the two sector model where there are six assumptions the five sector circular flow relaxes all six assumptions.
Since the first assumption is relaxed there are three more sectors introduced. Circular flow of income topics[ edit ] Leakages and injections[ edit ] In the five sector model, there are leakages and injections Leakage means withdrawal from the flow. When households and firms save part of their incomes it constitutes leakage.
They may be in form of savings, tax payments, and imports. Leakages reduce the flow of income.
Injection means introduction of income into the flow. When households and firms borrow the savings, they constitute injections. Injections increase the flow of income. Injections can take the forms of investment, government spending and exports. As long as leakages are equal to injections, the circular flow of income continues indefinitely.
Financial institutions or capital market play the role of intermediaries.
This means that income individuals receive from businesses and the goods and services that are sold to them do not count as injections or leakages, as no new money is being introduced to the flow and no money is being taken out of the flow.
Leakages and injections can occur in the financial sector, government sector and overseas sector: In the financial sector In terms of the circular flow of income model, the leakage that financial institutions provide in the economy is the option for households to save their money.
This is a leakage because the saved money can not be spent in the economy and thus is an idle asset that means not all output will be purchased. An example of a group in the finance sector includes banks such as Westpac or financial institutions such as Suncorp.
The first type of interaction occurs in markets for resources. The second type of interaction occurs in markets for products. The top half of the circular-flow diagram, which represents product markets, shows that households give money to businesses in exchange for goods and services. Money flows counterclockwise, while the goods and services flow clockwise. In markets for products, businesses usually are the suppliers and households usually are the demanders.
The money that flows from households to business firms is consumption spending from the perspective of households and is revenue from the perspective of business firms.
The products that flow from business firms to households are sales by the business firms and purchases by household consumers. The bottom half of the circular-flow diagram, which represents resource markets, shows that businesses give money to households in exchange for economic resources used as factors of production.
For example, when people work for a business, they are supplying their labor as a factor of production. In exchange for their labor, households are paid wages and salaries by businesses.
This is illustrated by the counterclockwise flow of money and the clockwise flow of economic resources. In markets for economic resources, households usually are the suppliers and businesses usually are the demanders.
The monies that flow from business firms to households are expenditures from the perspective of business firms and incomes from the perspective of households. The labor, capital, and natural resources that flow from households to business firms are sources of income from the perspective of households and inputs from the perspective of businesses.