Circular flow diagram

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Circular-Flow Diagram

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A visual model of the economy that simplifies it to include only two types of decision makers—firms and households.

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Firms in Circular-Flow Diagram

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Produce goods and services using inputs like labor, land, and capital. They sell goods and services to households.

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Households in Circular-Flow Diagram

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Own the factors of production and consume all the goods and services that firms produce.

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Markets for Goods and Services

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Where households are buyers and firms are sellers.

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Markets for Factors of Production

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Where firms are buyers and households are sellers.

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Outer Loop of Circular-Flow Diagram

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Represents the flow of dollars in the economy.

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Inner Loop of Circular-Flow Diagram

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Represents the flow of inputs and outputs in the economy.

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Revenue in Circular-Flow

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Money that firms receive from selling goods and services.

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Spending in Circular-Flow

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Money that households spend to buy goods and services from firms.

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Production Possibilities Frontier (PPF)

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A graph that shows the various combinations of output that the economy can produce given the available factors of production and technology.