![]() ![]() In its simplest form, revenue earned by firms by selling their output ultimately flows to households, which spend this income on the output produced by firms. Note: Dear readers, the rest of the models will be available soon. The circular flow of income illustrates the links between income and spending in an economy. 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. ![]() In the case of a free enterprise or mixed enterprise system, households own the factors of production and offer them to companies. The two-factor model is the most basic one, it explains in a simple manner how the economy works, the flow occurs as follows: There are different models, two, three, and four factor models. The functioning and interactions of all these elements create a complex flow that is explained by means of models or simple graphic representations. ![]() Models are simplified and theoretical representations of the functioning of the economy. Economic agents that are firms, individuals, families and the public sector.Factors of production (land, labor, capital, entrepreneur).The economic system is made up of the following elements: The economic systemĪ 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.Īll 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. You may not realize it, but fabrics make. 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 circular economy is a global shift in every aspect of our lives that seeks to eliminate waste and extend resources. 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). ![]()
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