Gabriel Barajas Lepez
Econ 001B L01
December 16, 2018
Circular Flow Matrix
Understanding that economics is not necessarily about money, stock markets, or trade but
about people and choices. Understanding economics can change the way you think in problem
solving, after all economics is just a group of people dealing with one another as they go about
their lives. Understanding the Circular Flow Matrix can be a helpful tool to understand what
economics is, whether you want to be a consumer or a seller. So why do I believe that at least
understanding this circular flow is important because you can realize that you have two choices
of markets you can participate in and whether you want to sell that good or buy that good you
can understand how firms and households interact. While studying this flow it is important to
understand the flow of inputs and outputs and the flow of dollars. This diagram is a visual model
of the economy that shows how dollars flow through markets among households and firms.
In a market for goods and services firms sell and households buy meaning that when a
household purchases a good or service (inputs) benefits the household more than his revenue if
he paid in cash (output). When a household buys a good or a service with his revenue, the cash
goes from his pocket to the firms increasing their revenue by selling you the good or service.
This dollar then can either be used to pay the firms employees, go to firms’ costs or go and pay
another firm either the way the money enters the income of some household and once again, Is
back in someone’s wallet. At the point, the story of the economy circular flow starts again. I
believe many societies live in this market or only understand this kind of market making them
only consumers in which the flow of dollars leaves the hands of households and enters the hands
of firms.
Breaking down flow of income Most, if not all, people go to work daily to earn a living.
The money that is earned is used to purchase goods and services from businesses such as food,
clothes, rent, basic commodities, entertainment services, health and wellness products, etc. The
income earned daily flows back to businesses continuously in a cycle known as the circular flow
of income. Businesses and companies manufacture goods or provide services to consumers. To
increase sales and profits, these companies use factors of production – labor, capital, and land – to
run their operations and grow their businesses. In return for their services, the hired labor is
given a wage or salary, known as income. The income received is used by households and
individuals to purchase the goods and services produced by these businesses. The businesses use
