CIRCULAR

FLOW OF
ECONOMIC
ACTIVITY
CHAPTER 11
Motivation
The difficulty lies, not in the new ideas,
but in escaping from the old ones.

– John Maynard Keynes

Objectives
At the end of this chapter, the student
should be able to:
1. Define the circular flow of
economic activities
2. Illustrate the circular flow of
production
3. Understand the other related
concepts in the circular flow
4. Describe the interrelationships of
households and firms.
5. Explain the causes of inflation,
deflation, and recession
The Circular
Flow of
Economic
Activity
 Related Economic Concepts
1. Flow - a quantity measured over a particular period of time. An
example of a flow is income
2. Stock - – a quantity measured at a given point in time. Example of
stock is wealth. Savings deposit is another example of stock.
3. Circular Flow – this is the movement of economic activities that is
taking place in the economic system.
4. Market – a place where buyers and sellers interact together and are
eventually engaged in exchange.
5. Basic needs - – these are the needs of man required for his survival like
food, clothing and shelter.
 Related Economic Concepts
6. Economic Resources - – these are also known as the factors of
production or inputs to production.
7. Wants - The form taken by a human need as shaped by culture and
individual personality.
8. Goods - – anything that yields satisfaction to someone. It may be
tangible or intangible.
9. Household is a person or a group of people that share their income.
10.Firm is an organization that produces goods and services for sale.
Outflows Inflows
1. Deflation 1. Inflation
2. Recession
The Circular Flow of Economic Activity
Intra-Production
Payment Flows Raw
Materials

Intermediate
Consumers Product
Firms

LEGEND

Product Flow
Final Product
Money Payments
 Resource-Production-Payment Flow

Raw Material Firms

Household
(Resource Owners)
Resources Intermediate Product Firms
Labor, Capital,
Entrepreneurship

LEGEND
Resources Flow Final Product Firms
Money Payments