1 Economic models The following diagram presents a circularf

1. Economic models

The following diagram presents a circular-flow model of a simple economy. The outer set of arrows (shown in green) shows the flow of dollars, and the inner set of arrows (shown in red) shows the corresponding flow of inputs and outputs.

  

Which of the following is true regarding this economic model?

Because it does not take into account international trade, the circular-flow diagram is useless for the purposes of modeling how dollars and resources move throughout an economy.

While simple, the circular-flow diagram can still be useful for the purposes of modeling how dollars and resources move throughout an economy.

Because, in reality, the economy is very large, the simplicity of the circular-flow diagram makes it useless for the purposes of modeling how dollars and resources move throughout an economy.

Because it does not take into account the role of government, the circular-flow diagram is useless for the purposes of modeling how dollars and resources move throughout an economy.

2. The circular-flow model

The following diagram presents a circular-flow model of a simple economy. The outer set of arrows (shown in green) shows the flow of dollars, and the inner set of arrows (shown in red) shows the corresponding flow of inputs and outputs.

  

Based on this model, households earn income when   purchase   in resource markets.

Suppose Becky earns $600 per week working as a programmer for PC Pros. She uses $10 to buy a box of aspirin at Pillmart Pharmacy. Pillmart Pharmacy pays Alex $500 per week to work the cash register. Alex uses $250 to purchase software from PC Pros.

Identify whether each of the following events in this scenario occurs in the resource market or the product market.

Event

Resource Market

Product Market

Alex spends $250 to purchase software from PC Pros.

Becky earns $600 per week working for PC Pros.

Alex earns $500 per week working for Pillmart Pharmacy.

Which of the elements of this scenario represent a flow from a household to a firm? This could be a flow of dollars, inputs, or outputs. Check all that apply.

Becky\'s labor

The $250 Alex spends to purchase software from PC Pros

The aspirin Becky receives

The $500 per week Alex earns working for Pillmart Pharmacy

Event	Resource Market	Product Market
Alex spends $250 to purchase software from PC Pros.
Becky earns $600 per week working for PC Pros.
Alex earns $500 per week working for Pillmart Pharmacy.

2. The circular-flow model The following diagram presents a circular-flow model of a simple economy. The outer set of arrows (shown in green) shows the flow of dollars, and the inner set of arrows (shown in red) shows the corresponding flow of inputs and outputs. Markets for Goods and Services Firms Households Markets for Factors of Production Based on this model, households earn income when purchase in resource markets. Suppose Becky earns $600 per week working as a programmer for PC Pros. She uses $10 to buy a box of aspirin at Pillmart Pharmacy. Pillmart Pharmacy pays Alex $500 per week to work the cash register. Alex uses $250 to purchase software from PC Pros.

Solution

Answer 1. b) While simple, the circular flow model can still be useful fir modelling how dollars and resources move in an economy.

This model describes the flow of products and money throughout the economy in a very simplified way.

The model represents almost all actors in an economy.