Economics

BBA 2501 Unit I Ch 1 Circular Flow Model

00:00:00 Well, hello, class, I'd like to talk to you in this video about the circular flow model.

00:00:09 Before we jump into the circular flow model, we gotta talk about the difference types of resources.

00:00:15 First, we have labor, this is human effort.

00:00:19 This is not only you lifting and carrying items while at work, it's also mental effort.

00:00:27 You and I can actually sell this to firms, governments, and the rest of the world.

00:00:35 Then we have capital.

00:00:37 This is both human capital and physical capital.

00:00:41 Now human capital is knowledge and skills of humans.

00:00:44 This is used to increase productivity.

00:00:48 Physical capital are the tools, the machines, the buildings, everything else that's used to produce goods and services.

00:00:58 Then we have natural resources.

00:00:59 These are things in nature.

00:01:01 This is water in the oceans and the lakes, oil reserves, trees, animals, you name it.

00:01:08 Anything in nature is a natural resource.

00:01:10 Even the dirt beneath your feet is a natural resource.

00:01:16 And then we have entrepreneurial ability.

00:01:18 That is the talent to create new products, find better ways to produce existing products, to manage production organization, and also assume the risk of profit or loss.

00:01:34 These resources, these four types of resources, are combined to make goods and services.

00:01:41 For instance, labor, cotton, colored dyes, and machines are combined to make the shirt that you can purchase at a store.

00:01:50 This shirt is considered to be a good, because you can see it, you can feel it, it is a good.

00:01:58 Now labor, a bus, and fuel can be combined to produce a tour bus service you may take while you're on vacation.

00:02:07 The bus ride is considered a service because it's intangible.

00:02:11 You cannot touch it, you cannot feel that tour.

00:02:16 It is a service.

00:02:18 Because goods and services are created using scarce resources, the goods and services themselves are also scarce.

00:02:28 In other words, they have a price.

00:02:35 Now let's look at the economic decision makers in the markets.

00:02:40 The first one is households.

00:02:42 Households demand goods and services produced in what we call a product market.

00:02:49 These households also supply labor and capital to firms, governments, and the rest of the world in the resource market because labor is a resource.

00:03:04 Firms and governments demand resources from households, along with natural resources.

00:03:10 And they use household natural resources to produce and supply goods and services that households demand in the product market.

00:03:24 Then we have the rest of the world come in.

00:03:25 These are foreign households, foreign firms, foreign governments.

00:03:30 And these supply resources and products to US demanders, as well as demand resources and products from the United States.

00:03:40 Now we can look at and we can summarize all of this information into what we call the circular flow diagram.

00:03:49 Here we have households on the left and firms on the right.

00:03:53 On the top, we have the product markets, and on the bottom, we have the resource markets.

00:03:58 Well, to start with, labor, capital, natural resources, and entrepreneurial ability goes into the resource market.

00:04:07 These come from households.

00:04:12 And these resources go into the firms.

00:04:16 The firms demand these resources.

00:04:19 The firms pay wages, interest, rent, and profit for these resources that they purchase, and that is income to the households.

00:04:37 Now these firms, they produce goods and services for the product market, and these products are purchased by households.

00:04:47 Households pay money for these products, and that represents revenue for the firms.

00:04:57 So as you can see, it's just a continuous circle, round and round.

00:05:03 Each demanding and supplying different types of labor, resources, supplying goods and services that are purchased.

00:05:14 It just keeps going round and round.

00:05:18 Now again, here's my dog.

00:05:21 She'd like to give you some highlights of the lesson.

00:05:24 And Luna would like to point out that there are four types of resources, labor, capital, natural resources, and entrepreneurial ability.

00:05:35 These resources are combined to make goods and services.

00:05:38 And these goods and services, well, they are scarce because the resources that are used to produce them are scarce.

00:05:47 Households provide resources to, and purchase goods from, and earn wages from firms.

00:05:58 And firms purchase resources from, provide goods and services to, and earn revenue from households.

00:06:08 Make sure that you read this section over in the book, very good section.

00:06:12 It'll give you a good foundation of what we're gonna be covering here in this first unit

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