PRINCIPLES OF ECONOMICS: Circular Flow of Economic Activities THE CIRCULAR FLOW OF ECONOMIC ACTIVITY There are two basic activities undertaken in any economy: production and consumption. The firms perform the production and consumption while households undertake consumption. To be able to produce, firms need the economic resources
consisting of land, labor, andcapital
– it is one of the factors of production which include land used for agriculture or industrialpurposes as well as natural resources taken for above or below the soil. Natural resources consistof energy resources like fossil fuel and geothermal emissions, non-energy resources like gold,diamond, and limestone, air and water and many others.
– refers to that basic factor of production which are productive services embodied inhuman physical effort, skill, and intellectual powers, and others. It consist of human time spent inproduction like driving buses, feeding cattle, singing in night clubs, acting in movies, or repairinghousehold appliances.
– durable goods produced in order to produce other goods. It consists of buildings,plant and machinery, roads, computers, ships, electric guitars, table tennis, tennis balls, etc.
STOCK AND FLOW OF CONCEPTS
Stock – refers to the measure of quantity at a point of time e.g. wealth as of December 31, 2001Flow – refers to the measure of movement of quantity of over a period of time e.g. savings(P1000/year) or consumption at P100,000/yearWhen economic resources are used in the production of goods and services, employmentof these resources occurs. A
is paid to resource owners whenever these resources are usedin production.
is paid to the landowner,
to the capitalist, and
to labor. Thegoods and services produced by these firms are consumed by households. The interaction between households and firms regarding production, consumption,employment and income generation results to the circular flow of goods and services in theeconomy. THE CIRCULAR FLOW OF GOODS, SERVICES AND INCOME The basic aspects of economy which include production and consumption are subject tothe stock and flow concepts which are circular in nature. THE PRODUCTION PROCESS The process of producing goods and services involves households and firms in a circular flow. Asshown again, the economic rsources of land, labor, and capital are provided by the householdsand used by the producing firms. These firms, in turn, produce goods and services which aredelivered to households for consumption. THE FLOW OF GOODS AMONG PRODUCING FIRMSWithin the circular flow of the production process is another flow which happens among differenttypes of business firms. This flow involves raw materials, intermediate goods and final goods.RAW MATERIALS – unprocessed goods like wood, sand and ironINTERMEDIATE GOODS – partially processed goods and still needsprocessing before it can be finally consumed likesteel bars, flour and microchips
Entrepreneurial Ability – land, labor, and capital will remain as they are until someone taps them toproduce the required goods and services. Actual production needs the ability of an entrepreneur to decideon and implement the right combination of the first three factors of production.1