Running Head: THE IMPORTANCE OF ECONOMICS AND THE
The Importance of Economics and the Understanding of the
Circular Flow Model and its Place in Society
Economics as a whole is a tool for understanding and studying production, distribution, and consumption of goods and services. Economics is concerned with the resourcefulness of scares resources with an optimum contentment of economic wants. Human beings are not only impacted by economics, but they are also considered to be a scarce resource in the way of labor power. Because humans are both the moving force of Economics and a resource behind Economics, the impact to society that Economics has ...view middle of the document...
Macroeconomics can be used to analyze how best to influence government policy goals such as economic growth, price stability, full employment and the attainment of a sustainable balance of payments.
Through the cyclical system, or circular flow model, economics can be easily understood at a level of supply and demand. Simply put, when society (the household) creates a demand for a product or service, they look to the businesses for their satisfaction. In order fro the businesses to produce the product they must obtain the resources for the manufacturing of the product. So in essence the household supplies the businesses with labor, land, capital, and entrepreneurial ability through the resource market. In return the businesses pay wages, rents, interest, and profits to the household, through the resource market. Now the household is satisfied with moneys, and the businesses are satisfied with the resources needed for production. In the next stage of the cycle, the business brings the goods and services in demand to the production market, where the household purchases them with the moneys gained from the resource market. This in turn brings revenue to the businesses, completing the cycle of the market system.
This simple economic model shows the relationship between money income and spending for the economy as a whole. The circle of money flowing through the economy is as follows: total income is spent (with the exception of "leakages" such as consumer saving), while that expenditure allows the sale of goods and services, which in turn allows the payment of income (such as wages and salaries). Expenditure based on borrowings and existing wealth – i.e., "injections" such as fixed investment – can add to total spending. The importance of the circular flow system in relations to the economy is extremely valuable. Through this cycle we can see monitor the rise or fall of the economy by simply watching and documenting. In equilibrium, leakages equal injections and the circular flow stays the same size. If injections exceed leakages, the circular flow grows (i.e., there is economic prosperity), while if they are less than leakages, the circular flow shrinks (i.e., there is a recession) (cosmeo).
Again this is all based on supply and demand. To better understand the system, knowledge of what constitutes...