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Circular Flow Of Economic Activity - The Fundamentals Of Managerial Economics
Managerial Economics - The Fundamentals Of Managerial Economics
Circular Flow Of Economic Activity - The Fundamentals Of Managerial Economics
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The individuals own or control resources which are necessary inputs for the firms in the production process.
Circular Flow Of Economic
Activity
The individuals own or control resources which are necessary inputs for the firms in the production process. These resources (factors of production) are classified into four types.
Land: It includes all natural resources on the earth and below the earth. Non renewable resources such as oil, coal etc once used will never be replaced. It will not be available for our children. Renewable resources can be used and replaced and is not depleted with use.
Labour: is the work force of an economy. The value of the worker is called as human capital.
Capital: It is classified as working capital and fixed capital (not transformed into final products)
Entrepreneurship: It refers to the individuals who organize production and take risks.
All these resources are allocated in an effective manner to achieve the objectives of consumers (to maximize satisfaction), workers (to maximize wages), firms (to maximize the output and profit) and government (to maximize the welfare of the society).
The fundamental economic activities between households and firms are shown in the diagram. The circular flows of economic activities are explained in a clockwise and counterclockwise flow of goods and services. The four sectors namely households, business, government and the rest of the world can also be considered to see the flow of economic activities. The circular flow of activity is a chain in which production creates income, income generates spending and spending in turn induces production.
The major four sectors of the economy are engaged in three economic activities of production, consumption and exchange of goods and services. These sectors are as follows:
Households: Households fulfill their needs and wants through purchase of goods and services from the firms. They are owners and suppliers of factors of production and in turn they receive income in the form of rent, wages and interest.
Firms: Firms employ the input factors to produce various goods and services and make payments to the households.
Government: The government purchases goods and services from firms and also factors of production from households by making payments.
Foreign sector: Households, firms and government of India purchase goods and services (import) from abroad and make payments. On the other hand all these sectors sell goods and services to various countries (export) and in turn receive payments from abroad
The above said four agents take economic decisions to produce goods and services and to exchange them and to consume them for satisfying the wants of the economy as a whole. Understanding the opportunities and constraints in the exchange is essential to take better decision in business. This is discussed in the forthcoming chapters in detail.
The economy comprises of the interaction of households, firms, government and other nations. Households own resources and supply factor services like land, raw material, labour and capital to the firms which helps them to produce goods and services. In turn, firms pay rent for land, wages for their labour and interest against the capital invested by the households. The earnings of the household are used to purchase goods and services from the firms to fulfill their needs and wants, the remaining is saved and it goes to the capital market and is converted as investments in various businesses. The household and business firms have to pay taxes to the government for enjoying the services provided. On the other hand firms and households purchase goods and services (import) from various countries of the world. Firms tend to sell their products to the foreign customers (export) who earn income for
the firm and foreign exchange for the country. Therefore, it is clear that
households supply input factors, which flow to firms. Goods and services
produced by firms flow to households. Payment flows in the opposite direction
(refer chart 1)
The individuals own or control resources which are necessary inputs for the firms in the production process. These resources (factors of production) are classified into four types.
Land: It includes all natural resources on the earth and below the earth. Non renewable resources such as oil, coal etc once used will never be replaced. It will not be available for our children. Renewable resources can be used and replaced and is not depleted with use.
Labour: is the work force of an economy. The value of the worker is called as human capital.
Capital: It is classified as working capital and fixed capital (not transformed into final products)
Entrepreneurship: It refers to the individuals who organize production and take risks.
All these resources are allocated in an effective manner to achieve the objectives of consumers (to maximize satisfaction), workers (to maximize wages), firms (to maximize the output and profit) and government (to maximize the welfare of the society).
The fundamental economic activities between households and firms are shown in the diagram. The circular flows of economic activities are explained in a clockwise and counterclockwise flow of goods and services. The four sectors namely households, business, government and the rest of the world can also be considered to see the flow of economic activities. The circular flow of activity is a chain in which production creates income, income generates spending and spending in turn induces production.
The major four sectors of the economy are engaged in three economic activities of production, consumption and exchange of goods and services. These sectors are as follows:
Households: Households fulfill their needs and wants through purchase of goods and services from the firms. They are owners and suppliers of factors of production and in turn they receive income in the form of rent, wages and interest.
Firms: Firms employ the input factors to produce various goods and services and make payments to the households.
Government: The government purchases goods and services from firms and also factors of production from households by making payments.
Foreign sector: Households, firms and government of India purchase goods and services (import) from abroad and make payments. On the other hand all these sectors sell goods and services to various countries (export) and in turn receive payments from abroad
The above said four agents take economic decisions to produce goods and services and to exchange them and to consume them for satisfying the wants of the economy as a whole. Understanding the opportunities and constraints in the exchange is essential to take better decision in business. This is discussed in the forthcoming chapters in detail.
The economy comprises of the interaction of households, firms, government and other nations. Households own resources and supply factor services like land, raw material, labour and capital to the firms which helps them to produce goods and services. In turn, firms pay rent for land, wages for their labour and interest against the capital invested by the households. The earnings of the household are used to purchase goods and services from the firms to fulfill their needs and wants, the remaining is saved and it goes to the capital market and is converted as investments in various businesses. The household and business firms have to pay taxes to the government for enjoying the services provided. On the other hand firms and households purchase goods and services (import) from various countries of the world. Firms tend to sell their products to
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