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    Quiz #4 Vocab Flashcards

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    Quiz #4 Vocab

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    circular flow diagram

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    represents how a market economy operates; shows the movement of resources, goods, services, and money payments; money and stuff always go in opposite directions

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    factor market

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    market for factors of production; the 4 resources(land, labor, capital, entrepreneurship); income to the resource owners who sell productive services, but costs to business firms that buy productive services

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    1/17 Created by cfailon

    Terms in this set (17)

    circular flow diagram

    represents how a market economy operates; shows the movement of resources, goods, services, and money payments; money and stuff always go in opposite directions

    factor market

    market for factors of production; the 4 resources(land, labor, capital, entrepreneurship); income to the resource owners who sell productive services, but costs to business firms that buy productive services

    product market

    costs to homeowners(resource owners) who buy goods and services; income to the business firms who sell goods and services

    Why both does the diagram include both a factor market and product market?

    if it was not circular, all of the money or all of the goods would end up on one side; everyone's costs/expenses are someone else's income; provides an interaction between markets; a continuous flow


    in the very middle of the circular flow chart; both the businesses and the homeowners give taxes to it in exchange for public services (roads/infrastructure, schools, defense, police/protection)

    How are businesses connected to factor and product markets?

    In factor markets, firms are consumers(buyers) of the 4 resources.

    In product markets, firms are sellers(producers) of goods and services(stuff).

    supply and demand

    determines the prices of land, labor, capital, and entrepreneurship in a factor market

    Where do resource owners(homeowners) get money to buy goods and services in the product market?

    from wages, rent, interest, profits(costs to the businesses)

    Where do firms get money to pay resource owners for the 4 resources in the factor market?

    from the revenue from selling goods and services to the households

    importance of interdependence in a market economy

    firms and households need money and stuff to flow from one to the other to keep the economy moving

    diminishing marginal utility

    important concept for consumption in economics; after a certain point, each additional unit of stuff consumed provides less additional value than the unit before it did; total utility continues to increase, additional utility slowly declines (buffet or strawberry shortcake example: tastes really good at first but after each bite the value decreases)

    diminishing marginal returns

    relates to production; value of each additional resource employed provides less additional output than the first few resources employed provide; added value of 1 more person working in a sub shop begins to decline after a while

    economic thinking

    want to find optimal amount of resources to employ and of goods to consume; more is not always better

    marginal benefits/costs

    benefit or cost of doing 1 more of something; additional


    optimal point; don't want marginal costs to be more than the benefit

    progressive taxes

    how it works for the federal income tax; wealthier people pay more taxes

    regressive taxes

    taking more taxes from people with lower incomes than with higher incomes

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    Verified questions


    Are the following true or false? Explain. a. Stocks with a beta of zero offer an expected rate of return of zero. b. The CAPM implies that investors require a higher return to hold highly volatile securities. c. You can construct a portfolio with a beta of .75 by investing .75 of the investment budget in T-bills and the remainder in the market portfolio.

    Source : quizlet.com

    Circular Flow Model

    In this video, learn about the circular flow of households and businesses interacting in the market for resources and in the market for goods and services, and see how money keeps the whole process moving.

    Circular Flow Model - Economic Lowdown Video Series

    Circular Flow Model showing a Market for Resources between Businesses and Households

    In this episode of the Economic Lowdown Video Series, economic education specialist Scott Wolla explains the circular flow model. Viewers will learn how households and businesses interact in the market for resources and in the market for goods and services, and see how money keeps the whole process moving.

    To provide students with online questions following each video, register your class through the Econ Lowdown Teacher Portal.

    Learn more about the Q&A Resources for Teachers and Students »

    Or, download the study guide and answer key (PDF).

    More episodes featuring economic concepts:

    The Economic Lowdown Video Series

    The Economic Lowdown Podcast Series


    This video received the 2015 Curriculum Silver Award from the National Association of Economic Educators and was a 2014 Gold Winner of the AVA Digital Awards.

    Read more about our award-winning resources »


    Let’s face it, the economy is complex and can be difficult to understand.

    Luckily, economists have developed models to help us learn and understand how the economy functions. One of the most useful is the circular flow model.

    The circular flow model highlights the “flows” within the economy—the flow of economic resources, goods and services, and the flow of money.

    To demonstrate the usefulness of the circular flow model, let’s follow a few dollars through a cycle.

    Imagine you are a hungry consumer who hears the homemade fries at the diner down the street calling your name. You take your money to the diner for a tasty meal.

    When you pay your check, you are buying goods and services. But the money doesn’t remain in the cash register for long.

    Alice, the diner owner, uses the money to purchase resources. She buys homegrown potatoes from a farmer; pays the server, who took your order, his wages; and makes a payment on the loan she got to buy new equipment for the diner. All of these are costs of production.

    After she has paid her costs of production, the remaining revenue is her profit—the income she earns as an entrepreneur owning and operating her diner.

    Let’s say your money goes to the farmer, and that for him is income. That money won’t remain in his wallet forever, though. Before you know it he will spend it, and the cycle will begin again.

    The circular flow model shows the interaction between two groups of economic decision-makers—households and businesses—and two types of economic markets—the market for resources and the market for goods and services. While the real economy is much more complex, the simple circular flow model is useful for understanding some key economic relationships.

    Let’s start with the two groups of economic decision-makers.

    On one side of the model are households. Households consist of one or more persons who live in the same housing unit, such as a family. Households own all the economic resources in the economy. The economic resources are land, labor, capital, and entrepreneurial ability.

    Land resources are natural resources. For example, these could be actual land owned by a farmer or other natural resources such as oil, water, and trees.

    Labor is just what it sounds like—work for which you are paid.

    Capital resources are goods used to produce other goods and services. For example, think of a hammer used by a carpenter or a computer used at a business.

    Finally, entrepreneurial ability is the human resource that combines the other resources to produce new goods and services and bring them to market. So, an entrepreneur might combine land, labor, and capital in new ways—taking risks along the way—to bring a good or service to market.

    On the other side we have businesses. A business is a privately owned organization that produces goods and services and then sells them. Businesses can be large, such as an automobile manufacturer, or small, such as a diner. And, businesses may produce goods, such as computers and bicycles, and services, such as haircuts and car repairs.

    But households and businesses are not isolated, they interact in markets.

    At the top of the model we have the market for resources. The market for resources is where households sell and businesses buy economic resources—land, labor, capital, and entrepreneurial ability. Notice that it is households who own all the economic resources.

    You might think of capital, say a delivery truck, as being owned by a business. But who owns the businesses? You guessed it—households. Whether a small diner owned by an individual, a partnership owned by several individuals, or a corporation owned by stockholders, all of these businesses are owned by people who are also members of a household.

    Source : www.stlouisfed.org

    Factor Market Definition

    A factor market is a resource for companies to buy what they need to produce their goods and services.


    Factor Market

    By THE INVESTOPEDIA TEAM Updated July 24, 2021

    Reviewed by ERIC ESTEVEZ

    What Is a Factor Market?

    "Factor market" is a term economists use for all of the resources that businesses use to purchase, rent, or hire what they need in order to produce goods or services. Those needs are the factors of production, which include raw materials, land, labor, and capital.

    The factor market is also called the input market. By this definition, all markets are either factor markets, where businesses obtain the resources they need, or goods and services markets, where consumers make their purchases.

    In the view of economists, there are only two markets: the factor market and the goods and services market.

    They also can be called the input market and the output market.

    The input market supplies the resources needed to make finished products.

    The output market buys and uses the finished products.

    The factor market is driven by demand in the goods and services market.

    Understanding a Factor Market

    A factor market is termed an input market, while the market for finished products or services is an output market. This can be viewed as a closed-loop flow: In the factor market, households are sellers and businesses are buyers, while in the goods and services market, businesses are sellers and households are buyers.1

    Workers are participating in the factor market when they make their services available to businesses. An individual member of a household who is looking for a job is participating in the factor market. An employee's wages are a component of the factor market, but the money will be spent in the goods and services market.

    The factor market provides every component required to produce goods and services.

    In the appliance manufacturing industry, workers who are skilled in refrigerator and dishwasher assembly are considered to be part of the factor market when they are available for hire. In the modern world, job search websites are part of the factor market.

    Similarly, raw materials like steel and plastic—both of which are used to build refrigerators and dishwashers—are also examples of factor market products.

    Anything used in the creation of a finished product—labor, raw materials, capital, or land—is an element of the factor market.

    Flow of a Factor Market

    The combination of the factor markets and the goods and services market forms a closed loop for the flow of money. Households supply labor to companies, which pay them wages that are then used to buy goods and services from companies.

    The goods and services market drives the factor market. When consumers demand more goods and services, manufacturers increase their purchases of the resources used to make those goods and services. Factor market producers, in turn, step up production of the raw materials that the manufacturers need.

    Free Markets in a Factor Economy

    The factor market is one of the defining characteristics of a market economy.

    Traditional models of socialism are characterized by the replacement of factor markets, which respond to the dictates of supply and demand, with central economic planning, which dictates supply and assigns resources accordingly.

    The assumption of socialism is that market exchanges are redundant within the production process if capital goods are owned by a single entity representing the interests of the society as a whole.

    A market economy has three components: the factor market at one end, the consumers market at the other end, and, in between, the producers—the companies that create the products we use.

    Monopoly and Monopsony in the Factor Economy

    A monopoly exists when there is only a single producer or seller of a product or service to serve many buyers. A monopsony is the opposite: there are many producers but only one buyer.

    Both are considered examples of market failures. The law of supply and demand can't work efficiently in either situation because of a lack of competition.

    This has particular relevance to the labor component of the factor market. An employee has no bargaining power in a town where there is only one possible employer. Moreover, a consumer faced with one brand has no choice but to pay the price demanded and accept the quality offered.

    A monopoly has an equally destructive effect in the factor market. A single supplier is under no pressure to cut prices, innovate, or even excel.

    Monopoly and monopsony are seen as disturbing the equilibrium of a factor market, which depends on competition to work efficiently.2

    Factor Market FAQs

    Here are the answers to some commonly asked questions about the factor market.

    Why Are Factor Markets Important?

    A market economy can't exist without three interdependent components: the factor market at one end, the goods and services market at the other end, and, in between, the producers—the companies that create the products we use.

    The producers obtain what they need in the factor market, produce finished products, and sell them to end-users. The end-users, by their actions, create and sustain demand for raw materials that are then made available by the factor market in order to supply the producers. This is known as derived demand.3

    The factor market responds to demand, and the cycle continues.

    Source : www.investopedia.com

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