CIRCULAR FLOW IN ECONOMICS

It is a known fact to all that there is a flow of cash happening daily from one hand to the other. In economics, when you take a greater and deeper look at it, you can see that this flow happens in an organized manner. Let us see how it is exactly happening.

 

Positive Sum Game

In a simple case, it can be a voluntary agreement. For example, there can be two kids who want to exchange something they have with them. One person can give his toy to the other person in exchange for some chocolate. This is the way a simple transaction of exchange can occur. But both the sides must be satisfied in the transaction. The kid gives his toy away would think the chocolate is worth more than his toy. The reverse holds true for the other kid. If both are not satisfied with this point, there is no chance for the transaction to happen at all. If both are satisfied it is known as a positive sum game.

 

Coercion

It could also be due to forced interaction. One of them would be forced to give their thing in exchange for the other. They may not be that satisfied in the process as the other person is. The action of one side become forced and does not remain voluntary. This happens when the person in great need of the object he wants in exchange. It could also be happening when the other person is forcing him. Considering the same example, when the kid with the chocolate wants the toy from the other kid, he could possibly threaten the boy. He could force him to give it up by threatening to beat him up or so.

 

The Circular Flow

The process of getting things alone can never happen. It has to be got in exchange for something. You will have to pay to buy something. It is not just the process of ‘take’ always. It goes along with the process of ‘give’ also.

Figure 1.  Circular Flow of Activity

The part one does not enjoy doing in this cycle is the work to be done in order to get or attain the good. But when the good is in hand, the person is at peace. Thus, it is very true to consider that the work was done and the production process are done not for the benefit of the firm, but for the attainment of the goods they want to. This would be the hard truth of economics. But this the way it has been working since ages and would continue to do so.

 

Circular Flow in Economics Homework Help