Circular Flow of Income in Simple Economy Video Lecture | Economics Class 12 - Commerce

hey this is Jacob Clifford welcome to
ac/dc econ today I'm going to show you
something that's all around you that
most people don't even see it's called
the matrix and you're inside it right
now the circular flow matrix or model
shows how products resources and money
flow in the economy now look at your
surroundings seriously take a moment and
look around you The Matrix is everywhere
it is all around us even though in this
very room in a market economy there's
households which is just people like you
and me and there's also businesses now
businesses sell goods and services to
the households in something called the
product market it's not like just one
place it's any where things are sold
like online or the mall the street
corner anywhere you can buy stuff the
computer or phone in front of you right
now is a great example
I mean you didn't produce that a
business did and they sold it to you in
the product market the same thing
applies to your chair or pencil or the
book over there everything around you
but to make those goods and services
businesses need resources like workers
and machines in the free market
households own the resources and they're
sold to the businesses in the resource
market economists point out that there's
four categories of resources or four
factors of production the first one is
land which is any natural resource or
anything that comes from Mother Nature
then there's labour then capital which
is tools and machines and finally
someone to bring it all together the
entrepreneur that's why it's called the
circular flow matrix those resources are
being used by the business to Bruce the
products that people turn around and go
by now what about money well it goes the
other direction when you buy your phone
in the product market you had to pay
them money that's called consumer
spending now that money makes its way to
the businesses and they call it revenue
but the business doesn't get to keep all
that money they got to pay for resources
and that's called the cost of production
it's being paid the engineers that
develop the phone those engineers earned
income economists break down income and
for different types and go along with
each of the four factors of production
they're called factor payments when you
sell land you earn rent when you sell
labor you earn wages for capital you get
interest and for entrepreneurship you
get profit so this is it the circular
flow matrix that shows how a market
economy works
now let me ask you a few questions and
see if you really understand the matrix
first question is your local mall an
example the product market or the
resource market it's both some people
are there to buy products in the product
market but there's some people who are
working or trying to get a job and
that's a resource market so products
resources and money are all being
exchanged okay next question do
businesses demand or supply the answer
is both they demand in the resource
market but they supply in the product
market households on the other hand
demand in the product market and they
supply in the resource market so both
businesses and households are supply and
demanding so far this model is showing
the private sector with just households
and businesses but there's a bunch of
important things missing like national
defense schools and roads those things
aren't produced by businesses so let's
add in the government and the public
sector the size and role the government
and economy depends on a country's
economic system but in most market
economies the government still plays a
role first the government buys goods and
services from businesses in the product
market for example fire trucks and just
like households they pay for them
that's called government spending the
government also buys resources in the
resource market like teachers and
firefighters again it pays for those
resources which is again called
government spending the government then
turns around and provides public goods
and services like fire protection
schools roads and bridges to businesses
and households the government also pays
money to businesses called subsidies or
households called welfare economists
call those transfer payments there are
situations when the government's giving
out money but not for goods and services
if to meet some other objective like to
alleviate poverty or get companies to
produce more fuel-efficient cars but how
does the government afford to provide
public goods and welfare and subsidies
well they tax businesses and households
income taxes and sales taxes fund
government projects and programs now
there's several things still missing
from this matrix including a financial
sector where money isn't spent it's
saved and then loaned out and also the
role of other countries with exports and
imports but for now this diagram gives
you a pretty good idea of how to modern
economy works one final thought in the
movie The Matrix enslaves people you are
a slave neo like everyone else you were
born into bondage many people wonder if
capitalism in this hamster wheel of
constantly spending
earning and spending and earning
enslaves people now would your life be
better off when you hold a thorough and
just lived out in the woods I don't know
but what I do know is there's a lot of
things you'd have to live without first
there'd be no cell phones or computers
so say goodbye to YouTube and also
there'd be no modern medicine or
hospitals it would be nice if none of us
had to work but there's a trade-off to
that so does the matrix enslave us or
liberate us let me know in the comments
below I its watching til next time next
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