•Households and Firms

•Participants = households & firms

•Households: a psn or group of ppl living in a single residence

•Own FOP

•Firm (business): organization that uses resources to produce a product or service, which it then sells

• transform inputs (factors of production) into outputs (goods/services)

Circular Flow Model of a Market Economy

• Visual representation of exchanges that take place in a free market economy

• Shows how households and firms exchange money, resources, and products

Factor Markets (Resource Markets)

• Lower half of circular model

• Firms purchase factors of production from households (factor market)

• Purchase or rent land• Hire workers, pay

wages/salaries• Borrow $ from

households to pay capital

Product Market

• Top half of circular flow model

• Households buy goods and services that firms produce (product market)

The Self-Regulating Nature of the Market Place

• The Wealth of Nations

• Adam Smith: both the buyer and seller consider only their self-interest.

• Self-interest = motivating force in free market

• Positive incentive of lower prices = buying of more goods

The Invisible Hand

• Self-interest and competition regulate the market economy

• Laissez-Faire government

• Market is self-regulating and supply & demand = the invisible hand

• Coined by Adam Smith

Incentives

Circular Flow Model of a Mixed Economy