This picture is designed for my Macroeconomics students (and any others who may find it useful).
In Economics, we are given a very helpful “Photo” or picture of the economy called the Circular Flow Diagram. (remember, “circular flow” means ‘to go in a circle’).
We know from this picture that every economy is made up of two kinds of stores — 1) those that sell products they have created to consumers (Product Market) and 2) those that sell the factors of production like land, labor, and capital (Factors of Production Market).
Economic Trade = Goods Market + Factors of Production Market
Each market is then made up of Supply and Demand. Supply is how many products the store has available for sale. Demand is how many products the buyer will purchase if given the opportunity.
Let’s say the Quantity Supplied is 20. . . . why 20? Why not 0? What can we do to make the store offer more? What can we do to have lower supply?
Supply is made up of six main factors:
- Price of the product
- Price of Inputs (cost of making the product)
- Price of Related Goods in Supply (for example, the price / revenue of an alternative product)
- Level of Technology
- Expected Future Price
- Number of Companies in the market.
Demand is also made up of six main factors:
- Price of the product
- Income of the buyers
- Price of Related Goods in Demand (for example, the price/cost of buying an alternative product)
- Level of Taste (do you like it)
- Expected Future Price
- Number of Buyers in the market.
Everything we study in Microeconomics and Macroeconomics fits into this picture of the economy. All of our resources go into one of the two markets. All of our topics fit into Supply and/or Demand. All issues are somewhere in the factors of supply or demand.
Unemployment for example is often a problem in demand (no companies want to hire). Where in demand? — Maybe Taste (they don’t like the new graduates, think they are lazy) or Price (the workers are demanding higher salaries).
GDP is an issue involving lots of factors — Number of Buyers (population), Income, Prices, etc.
Price Controls & Equilibrium – Prices, Price of Inputs, Price of Related Goods, Future Prices
Interest Rates – Prices and Income
Inflation – Prices and Income
As long as you understand the factors of the economy, you should start to see why we look at the things we do for economics classes!
Deceptively Blonde 