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Presentation/PPT
27/08/2022
Take at the figure above. This is a modified circular flow diagram (like you might see in a macro economics course). For a brief introduction to (or review of) circular flow diagrams, go here:http://en.wikipedia.org/wiki/Circular_flow_of_income(and/or google the phrase “circular flow diagram”).
Firms engage in exchanges to secure labor inputs, to secure capital, and to sell their output (goods/services). Inter-firm transactions are ignored (because we’re talking about firms in a collective sense), and there are a few other simplifications (e.g. the way government and the “rest of the world” are represented).
Think for a minute about what it means for economic value to be transferred in a voluntary exchange. For example, if I go to a store and buy a shirt that I feel is worth $30 (in other words, I am indifferent about whether or not I have the shirt or I have $30), and the shirt costs $20, then I come away feeling $10 richer (this is referred to as consumer surplus). In this exchange, $10 of economic value is transferred to me, the customer. The same principle can be applied to exchanges with labor and exchanges with capital.The notion of conservation of economic value suggests that if a firm creates economic value, it must “go” somewhere (it doesn’t just disappear), and there are only three places (or exchanges) where it can go. This implies that created economic value has to go to either labor (in the form of wages that are above the minimum value that labor would have accepted or that are considered to be “fair” based on norms or societal standards), to customers (in the form of consumer surplus, as illustrated by the shirt example above) or to those who have supplied capital (the “owners”) in the form of return on investment above the minimum they would accept. It is assumed that the company receives collective inputs (or public goods, subsidies, etc.) that are equal to the value of any taxes paid, and any transactions with the “rest of the world” are ignored.
From your reading of the case materials (in the Getting Started thread), here are a few questions to get the discussion going:
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