Economic Theories and Their Applications

Circular-Flow Model of Economic Activity

A circular-flow model of economic activity is a model that shows how money moves through an economic system. The most common version of this model represents the cyclical flow of income between the household and corporate sectors (Tsoulfidis & Tsaliki, 2019). Households buy goods and services from companies sold in the product market. On the other hand, companies need the resources to create products and services. Circular-flow model depicts how cash circulates in society—money actions from manufacturers to personnel as wages, then again to manufacturers as product payment.

The following example demonstrates how I, as a consumer, fit in the model, and the example of Starbucks plays a role in the business within it. The circulation of money begins in my household when I decide to go and buy a drink. I go to the local Starbucks spot and spend my money on the goods of the economy’s market. Thus, the money I have paid for the company’s product goes into its cash register and turns into its revenue. Starbucks then uses those cash for buying market inputs for various production factors, such as rent, wages, and more. Thus, the money enters the new household income, and the circular flow begins again.

Macroeconomics and Microeconomics

Microeconomics and macroeconomics are two types of economics that have distinct differences in the topics they cover. Individual and corporate decision-making is considered in microeconomics, and national, and government behavior is considered in macroeconomics. Microeconomics involves the decisions people and businesses make regarding allocating resources and the prices at which goods and services are traded (Mankiw, 2018). Taxes, regulations, and state laws are considered in the microeconomic processes. Supply and demand, and other dynamics that influence the economy’s price level, are the subject of microeconomics. In other words, microeconomics aims to understand human behavior, decisions, and resource allocation.

On the other hand, Macroeconomics does not try to answer or explain which forces should exist in the market. Rather, it tries to explain what happens when certain conditions change (McCarthy et al., 2018). For example, microeconomics is studying ways to maximize production and capacity to lower prices and compete more effectively. Macroeconomics, in contrast, examines how national behavior and its policies affect the economy as a whole. A top-down strategy is needed because it applies to the industry and the economy as a whole, not to individuals or individual companies.

Macroeconomic and Microeconomic Topics

Macroeconomics look at aggregate indicators such as GDP, unemployment, price indexes to see how the economy as a whole work, national income, production, consumption, unemployment, inflation, savings, investment, government spending, etc. These topics fit macroeconomics because they develop a model that describes the relationships in international trade. Together, these principles form a group of variables known as economic indicators. When combined, these indicators are categorized as leading, delayed, or coincident for predictive power, providing economists with attributes that set economic trends ((McCarthy et al., 2018). Macroeconomic studies show how changes in net exports affect a country’s financial balance and how the unemployment rate affects GDP.

Such topics as scarce resources, money prices, and the supply and demand of products and services fit microeconomics because they are used to explain why, all other things being equal, the price of an item tends to rise when its supply diminishes (Mankiw, 2018). These topics separate individual variables and try to find a causal relationship or a strong correlation between each other. Microeconomics argues that human actors are rational and use scarce resources to achieve certain goals (Mankiw, 2018). Microeconomics and macroeconomics are often in contrast in terms of the topics that fit each one.

Applications for the Production Possibilities Theory

Production possibility theory finds application to international trade, the economic system choice, and economic growth. International trade facilitates the production of all kinds of goods and services. The quantity of employment of a country’s elements of manufacturing has not had anything to do with its alternate policy. South America and Europe, for example, have complete employment after they do not alternate and convey on the midpoints in their respective manufacturing ability curves. Nevertheless, the nations are running on their manufacturing functionality curves when it involves commerce: they are each employed.

The production possibility theory affects the choice of the economic system of different nations. In some European economies, such as France, Germany, and Sweden, regulation is high enough to move closer to the center of the spectrum (Mahmood & Ahmad, 2018). Once operating at the edge of the spectrum of command socialism, Russia and China are now classified as mixed economies (Novokmet et al., 2018). Most Latin American economies were once on the right side of the spectrum. Their government did not exercise ownership of the widespread capital and natural resources known to the socialist system but enforced some rules. Many of these countries are in the process of implementing economic changes that approach market capitalism.

As a result of economic growth, the economic productivity curve shifts outwards. Economic growth is supported by increasing the number and quality of production actors available to the economy and improving the technologies available to the economy. The United States and other economies have made significant strides in developing products and services in recent years, with technological advances ranging from new methods of mapping petroleum resources to new technologies for milking dairy cows. They helped expand the country’s production potential and have contributed to the expansion of the economy.


Mahmood, T., & Ahmad, E. (2018). The relationship of energy intensity with economic growth: Evidence for European economies. Energy strategy reviews, 20, 90-98. Web.

Mankiw, N. G. (2018). Principles of microeconomics.

McCarthy, A., Dellink, R., & Bibas, R. (2018). The macroeconomics of the circular economy transition: A critical review of modelling approaches. Web.

Novokmet, F., Piketty, T., Yang, L., & Zucman, G. (2018). From communism to capitalism: private versus public property and inequality in China and Russia. AEA Papers and Proceedings, 108, 109-13. Web.

Tsoulfidis, L., & Tsaliki, P. (2019). Circular Flow of Capital and Social Reproduction. Classical Political Economics and Modern Capitalism, 41-82. Springer, Cham. Web.

Cite this paper

Select style


BusinessEssay. (2023, August 6). Economic Theories and Their Applications. Retrieved from


BusinessEssay. (2023, August 6). Economic Theories and Their Applications.

Work Cited

"Economic Theories and Their Applications." BusinessEssay, 6 Aug. 2023,


BusinessEssay. (2023) 'Economic Theories and Their Applications'. 6 August.


BusinessEssay. 2023. "Economic Theories and Their Applications." August 6, 2023.

1. BusinessEssay. "Economic Theories and Their Applications." August 6, 2023.


BusinessEssay. "Economic Theories and Their Applications." August 6, 2023.