“The Circular Flow – Mixed Economy”

 > Explanatory Article by Marios Kyriakou, MSc Economics


About the author: Marios Kyriakou has a bachelor’s degree in Economics from the University of Cyprus and a master’s degree in Economics from the University of Warwick. He is also a holder of CySEC’s Advanced Certificate in Financial Services Legal Framework and a professional in Online Trading, Forex and CFDs with more than 7 years of experience.

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<Last updated 13.04.2020>

Dear reader,

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.


 

“I hope I am clear on this one. If not, contact us on social media and we will do our best to help you.

Thank you for reading my articles and watching my videos.”

Marios Kyriakou

References:
Ιωάννου-Σεργίου Μ., Μάτση Μ., Σάββα Ν., Σταύρου-Παπαδοπούλου Λ., Οικονομικά Α’ Λυκείου, Α΄ Έκδοση 2016. Υπηρεσία Ανάπτυξης Προγραμμάτων, Κύπρος.
Βλαδιμήρου-Παναγιώτου Β. και Κουζαλή-Σωτηρίου Ε., Οικονομικά Β’ Λυκείου, Κύπρος, Α΄ Έκδοση 2016.  Υπηρεσία Ανάπτυξης Προγραμμάτων, Κύπρος.
Βλαδιμήρου-Παναγιώτου Β. και Κουζαλή-Σωτηρίου Ε., Οικονομικά Γ’ Λυκείου, Κύπρος, Α΄ Έκδοση 2017.  Υπηρεσία Ανάπτυξης Προγραμμάτων, Κύπρος.
Besanko, David Braeutigam, Ronald R. Gibbs, Michael, 2011, Microeconomics, Hoboken: John Wiley, 4th ed,
International student version
Frank, Robert H., 2010, Microeconomics and Behavior, New York: McGraw-Hill Irwin, 8th ed.
Estrin, Saul Laidler, David E. W. Dietrich, Michael ., 2008, Microeconomics, Harlow: FT/ Prentice Hall, 5th ed.

Disclaimer: This article is intended for educational purposes only and does not replace independent professional judgement. Its purpose is to act as a complementary educational service to society, promoting personal development and social, economic and cultural progress of citizens. While this content has been prepared in good faith, no representation or warranty, express or implied, is or will be made and no responsibility or liability is or will be accepted by the creator to the accuracy or completeness of the information presented or any other written or oral information made available to any interested party and any such liability is expressly disclaimed.

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