The Cycle of Economics | How Economics work (simplified)
In the market economy there are households and on the other side, businesses. Businesses sell goods and services to the households via product-market or to simply stores, it’s basically where you can buy “stuff”, for example an iPhone, you didn’t produce the iPhone, Apple did it for you but with money you can have an iPhone, this example applies in everything.
However, you may be thinking — ”but where businesses go to get resources?”- easy, they pay to the households for these types of resources, this transaction is called “resource or factor market”.
In the economy there are 4 types of resource — land, labor, capital(tools and machines) and least but not last Entrepreneurship.
So, what about money?! — well, it goes in the opposite direction, households pay to the businesses for products(consumer spending) and businesses pay to the households(costs) for resources.
The equation isn’t complete yet, to equilibrate the counts we need the help of the government, that’s called the public sector. The “size” of the help in a country depends on the countries economic system, so let me explain, the government buys goods and services from businesses via the product market — yes like the households! — and they pay for them(government spending), the government also “buys” resources at the resource market, for example, teachers and all people that work in the public sector and again pay for it(government resources). The government also provide public goods like bridges, roads, public hospitals, schools, and many other important things for businesses and households, to complete the government can also give subsidies to businesses and welfare to the households(these transactions are called transfer payments and occur to meet specific objectives and problems). Now you must be thinking — but where the government goes to get the amount of money to pay so many things?! — well, the government taxes in businesses and households.
To conclude you can see this image of the cycle of economics, see you in the next article.
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