Circular Flow of Economic Activity Lesson Plan

Instructor: Bret Sikkink

Bret has a Master's degree in Education and taught Economics for college credit in Mexico for six years.

In this lesson, students will develop business ideas and apply the concept of the circular flow of economic activity to their business ventures and then describe the flow of money and inputs between households and businesses.

Learning Objectives

After completing this lesson, students will be able to

  • define the microeconomic circular flow of income
  • interpret examples that illustrate the behavior of economic actors
  • provide stylized examples of their own to show understanding


30-60 minutes

Curriculum Standards


Determine the central ideas or conclusions of a text; summarize complex concepts, processes, or information presented in a text by paraphrasing them in simpler but still accurate terms.


Acquire and use accurately a range of general academic and domain-specific words and phrases sufficient for reading, writing, speaking, and listening at the college and career readiness level; demonstrate independence in gathering vocabulary knowledge when considering a word or phrase important to comprehension or expression.


Access Prior Knowledge

Begin by asking students to consider starting their own small business, such as a lemonade stand, by asking the following questions in order.

What will they need to acquire on Day 1?

  • Responses may include Land (space for their stand), Capital Goods (table, glass pitcher, materials for lemonade) and Labor (themselves or someone to make the lemonade, work the stand, create advertising, etc).

How will they acquire those resources (known as Factors of Production) for Day 1?

  • Responses should include the concept of money: either by borrowing from parents or the bank (using credit) or money they have acquired from other sources of income (using savings).

Consider opening the lemonade stand on Day 2. What will they need to acquire?

  • Responses should indicate that they need to purchase fewer materials than they did the day before, and potentially none at all.

What would happen when they run out of a key resource, such as sugar, on Day 2?

  • Responses should indicate that the students would not use credit or savings this time, but rather they would re-invest their profits from the lemonade stand to purchase additional factors of production.

Finally, what would the students do with the profits that they make?

  • Students may give answers such as hiring additional workers, buying additional resources, buying other goods and services, or putting their earnings in the bank. Try to highlight that those answers fall into the following categories: Business Investment, Consumer Expenditures, and Savings.

Review the Video Lesson

Play the video lesson Circular Flow Model in Economics: Definition & Examples

  • Reproduce the circular flow model from the video or pause the video at 2:32.
  • Discuss the example of George, the Entrepreneur, who opens a restaurant. Can students give examples of households, businesses, inputs, and money for that example? This can be a discussion or you can project or draw the image on a whiteboard and add labels. Leave the enhanced circular flow model image up as a scaffold and to check for understanding after the following activity.


Ensure that all students have something to write on. Give the following instructions for the whole class.

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