ABSTRACT

The utility perspective in economic theory was incomplete until the entire economic process, as envisioned and defined in this tradition, could be shown to be wholly the result of rational, calculating, maximizing behavior. The economic process is seen, in this perspective, as having two important focal points-the household and the business firm. There are two continuous circular flows between these points. First, there is what economists call a “real flow.” Households are viewed as the owners of the “factors of production” and as the consumers of final consumption goods. Based on a calculation of their marginal utilities, they decide how much to sell to business firms of each of their various factors of production and how much to buy of each of the various consumption goods. The real flow therefore is a flow of the use of productive factors from households to business firms and a return flow of consumption goods from business firms to households.