Circular Flow Model Essay

Concepts Behind the Circular Flow Model
Economics is a multifaceted subject that takes years of study and research to fully grasp. Because it is also a very important subject to everyone, it is important that we all understand it. However, not all of us are economists or have the time to devote to such a study. This is where models come in. Economists take the key points, main concepts, and/or statistical data and simplify them for the rest of us. One such economic model is the Circular Flow Model. The movement of goods and services through markets and the movement of resources through markets is no doubt very complex. However, this movement becomes much easier to understand if you take a particular good and analyze its movements with the Circular
The logic behind this is that coffee first has to be grown. Who grows coffee crops? People. People are part of a household. This may seem a little flawed as it is usually a business that farms a crop and sells it to another business. In order for this to make more sense, think of the business growing the crop as a family farm. The farm sells to businesses in order to create a profit, keep their farm running, and feed their family. Therefore, according to the model, households supply the coffee crop to businesses (Households also supply the labor, land, and equipment needed to grow the coffee, but for right now we’ll stick with just the coffee itself). At this stage, the coffee crop is flowing through the market for resources from a household to a supplier of goods and services in exchange for money (Federal Reserve Bank of St. Louis,
Their next move is to turn those resources into goods to sell to their customers. Of course, there are many things you can sell to customers that contain coffee in some form. For the sake of simplicity, assume that the business is a café and will be selling fresh brewed coffee to their customers. When the barista grinds the coffee and brews a cup of steaming coffee, they are transforming the resource into a good. That good is then sold to customers in exchange for money. These customers are part of a household and because coffee originated in households, the process has come full circle at this point (Federal Reserve Bank of St. Louis,