Circular Flow of Economy

All the elements of the economic system are related and interact with each other, giving rise to the economic circuit, where production units offer goods and services (supply) and consumer units demand them (demand).

The circular flow of economic are the real interactions (of goods and services) and monetary (money and values) interactions that occur in a market, and this is reflected through a simple graphic representation.

The economic system

A system a set of connected things that operate together (1), in this case, actions linked to each other that contribute to the economic situation of a society.

All the activities of the economic process are carried out within a given society, with given structures that make up what is called the economic system.

Elements of the economic system

The economic system is made up of the following elements:

• Goods and services.
• Economic activities.
• Factors of production (land, labor, capital, entrepreneur).
• Economic agents that are firms, individuals, families and the public sector.

Circular flow models

Models are simplified and theoretical representations of the functioning of the economy. The functioning and interactions of all these elements create a complex flow that is explained by means of models or simple graphic representations.

There are different models, two, three, and four factor models.

Two-factor model economy

The two-factor model is the most basic one, it explains in a simple manner how the economy works, the flow occurs as follows:

In the case of a free enterprise or mixed enterprise system, households own the factors of production and offer them to companies.

Then, the companies pay for them and once they have them, they produce goods and services that sell at a certain price to the households who pay for said goods and services with the income they previously received from the companies, as represented in the diagram below.

Note: Dear readers, the rest of the models will be available soon.