At the end of this lesson, Students will be able to:

 Explain the circular flow of moneykDescribe the characteristics of

Corporations
 Distinguish between Corporation and Partnership
Definition of circular flow of money:
• The circular flow model demonstrates how money moves through
society. Money flows from producers to workers as wages and flows
back to producers as payment for products. In short, an economy is
an endless circular flow of money.
• That is the basic form of the model, but actual money flows are more
complicated. Economists have added in more factors to better depict
complex modern economies.
• These factors are the components of a nation's gross national product
(GDP) or national income. For that reason, the model is also referred
to as the circular flow of income model.
Definition of circular flow of money:
The circular flow model is an economic model that shows the flow of
money through the economy. The most common form of this model
shows the circular flow of income between the household sector and
the business sector. Between the two are the product market and the
resource market.
Households purchase goods and services, which businesses provide
through the product market. Businesses, meanwhile, need resources in
order to produce goods and services. Members of households provide
labor to businesses through the resource market. In turn, businesses
convert those resources into goods and services.
Circular flow of Money in the Economy
Circular flow of Money in the Economy
The economy can be thought of as two cycles moving in opposite directions. In
one direction, we see goods and services flowing from individuals to businesses
and back again. This represents the idea that, as laborers, we go to work to make
things or provide services that people want.
In the opposite direction, we see money flowing from businesses to households
and back again. This represents the income we generate from the work we do,
which we use to pay for the things we want.
Both of these cycles are necessary to make the economy work. When we buy
things, we pay money for them. When we go to work, we make things in
exchange for money. The circular flow model of the economy distills the idea
outlined above and shows the flow of money and goods and services in a
capitalist economy.
4 Factors of Production

In economics, there are four types of resources, known as factors of production. Each
factor of production has a unique type of payment associated with it, called factor
payments.
1. Labor. These are workers. The factor payment for labor is referred to as “wages.”
2. Land. This includes land that is rented or purchased, as well as other components
like natural resources and raw materials. The factor payment for land is referred to as
“rent.”
3. Capital. This is money used to buy the tools that labor implements to convert land
(i.e., natural resources) into goods. The factor payment for capital is called “interest.”
4. Entrepreneurs. These are the people who put the other three resources together
to create a successful business. The factor payment for entrepreneurs is called
“profit.”
• A simple economy assumes the existence of only two sectors, i.e.
household sector and firm sector.
• 1. Households are the owners of factors of production and consumers
of goods and services.
• 2. Firms produce goods and services and sell them to the households.
It is the simplest form of closed economy, in which there is no
government sector and foreign trade.
Closed Economy is an economy which has no economic relations with
rest of the world. Open Economy is an economy which has economic
relations with rest of the world.