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 RISK POOLING: Combining the uncertainty of individuals into a calculable risk for large groups. For example, you may or may not contract the flu this year. However, if you're thrown in with 99,999 other people, then health-care types who spend their lives measuring the odds of an illness, can predict that 1 percent of the group, or 1,000 people, will get the flu. The uncertainty is that they probably don't know which 1,000 people, they only know the number afflicted. This little bit of information is what makes risk pooling possible. If the cost is \$50 per illness, then an insurance company can insure your 100,000-member group against flu if they collect \$50,000 (\$50 x 1,000 sick people), or 50 cents per person. By agreeing to pay the cost of each sick person in exchange for the 50 cent payments, the insurance company has effectively pooled the risk of the group.

PHYSICAL FLOW:

In the circular flow model, the transfer of goods and services from the business sector to the household sector and the transfer of resource services from the household sector to the business sector. The physical flow is usually illustrated as a counter-clockwise flow for a model with the product markets at the top, resource markets at the bottom, household sector at the left, and business sector at the left. The payment flow moves in the opposite direction.
The physical flow, the physical movement of goods and services, is the foundation of the circular flow model. The fundamental problem of scarcity is addressed by physically transforming scarce resources into goods and services that are then used to satisfy wants and needs. This requires the physical exchange of commodities between the household sector, which has the resources, and the business sector, which produces the goods.

### A Simple Example

For example, when Alicia Hyfield buys a Waldo's Super Deluxe TexMex Gargantuan Taco this taco "flows" from the Waldo's TexMex Taco World in the business sector through the product markets and ends up in the possession of Alicia, a member of the household sector.

In addition, the labor services of Edgar Millbottom, an employee of Waldo's TexMex Taco World, "flows" from the household sector through the resource markets and ends up with Waldo's TexMex Taco World in the business sector, where it is used in the production of an Waldo's Super Deluxe TexMex Gargantuan Taco.

### A Simple Model

The Physical Flow
This diagram illustrates the physical flow aspect of the circular flow. This is, by the way, the simplest version of the circular flow model. This model contains two sectors. At the far left is the household sector, containing people seeking consumption. At the far right is the business sector doing the production. Two sets of markets are also included. At the top are the product markets that exchange final goods and services, or gross domestic product. At the bottom are the resource markets that exchange the services of the scarce resources.

A reasonable starting point for tracing the payment flow is the household sector. Because it owns all resources, it supplies the services of these resources to the business sector through the resource markets. The business sector then uses the resources to produce the goods and services that are then supplied to the household sector through the product markets. This flow of resources from the household to the business sector and production from the business to the household sector is the physical flow.

### Running Through the Physical Flow

How about a few notable points on this physical flow?

• First, focusing on product markets, the household sector is the demand-side and the business sector is the supply-side. Production flows from the business sector to the household sector through the product markets.

• Second, looking at resource markets, the household sector is the supply-side and the business sector is the demand-side. Resource services flow from the household sector to the business sector through the resource markets.

• Third, the household sector sells the resources through the resource markets and buys goods through the product markets. The household sector does the consumption. It supplies the resources that are used to produce the consumption goods that satisfy wants and needs.

• Fourth, the business sector buys resources through the resource markets and sells goods through the product markets. The business sector does the production. It buys the resources that it transforms into wants-and-needs-satisfying goods.

### A Word About the Payment Flow

The physical flow of goods, services, and resources is countered by the payment flow that moves in the opposite direction. The payment flow is the movement of money payments from the household to the business sector in exchange for final goods and services and from the business to the household sector in exchange for the services of resources. The payment flow is usually represented as a clockwise movement.

 <= PHENOMENON PHYSICAL SCIENCE =>

Recommended Citation:

PHYSICAL FLOW, AmosWEB Encyclonomic WEB*pedia, http://www.AmosWEB.com, AmosWEB LLC, 2000-2016. [Accessed: September 26, 2016].

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