<Last updated 13.04.2020>
Hi! If you are interested in Economics, I’ve prepared the below to help your understanding. You should take a look at this short article in which I discuss about the circular flow of income, factors of production, goods and services and money in a Mixed Economy system
We have seen in previous videos that the main Economic Agents that exist in a Mixed Economy System are: households, businesses and the government. Households have needs and wants that must be satisfied. Businesses provide resources, goods and services, through the markets to households and so needs can be satisfied. The government designs the framework of rules laws and regulations based on which the markets will operate smoothly and ensures that people have the right of private ownership and full freedom for employment, production and consumption.
The market mechanism makes possible to to produce and distribute the products ans services to the people. It is a mechanism that brings Buyers and Sellers together.
In this simple form of Circular Flow we see the two important markets existing in the economy, the market for factors of production and the market for goods and services. The economic agents interact with each other in such a way that household expenditure for acquiring goods and services is income for businesses. And how business expenditure for factors of production such as land and labor, is income for households.
The green arrows represent the Income/Expenditure flow (money) which is transferred from households to businesses and vice versa. Businesses use money to buy land, capital and labor from households, through the Market for Factors of Production. So these factors are transferred from households to businesses, depicted with the red arrows.
Example: a business hires a person, who is part of a household and is paying a fixed salary/wage for that person’s services. Another example: a business rents an office, needed to provide services, and pays a fixed amount/rent every month to the owner > who is also part of a household.
Households use money to buy goods from businesses, through the Market of Goods and Services. So goods are transferred from businesses to households, depicted with the orange arrows.
While this economic activity is taking place, the government imposes taxes, or charges, on both households and businesses. For example, income tax, which is part of a persons income. This happens in order to accumulate funds which is essentially Government Revenue. These are called Public Savings after deducting Government Expenditure, which is necessary for covering public, national needs and government functions.
Expenditures example: on economic infrastructure (roads, public transportation, sanitation, legal systems, public safety, education, health-care systems), military, scientific research, culture and the arts, public works, public insurance, on other provisions and subsidies and the operation of the government itself. These provisions/subsidies are depicted in blue color.
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