Circular flow model6/30/2023 ![]() The flow of dollarsįirms pay wages, rent, and profit to the households for their supply of the factors of production in the market for factors of production. The households will then buy these goods and services from the firms through the market for goods and services. The firms will then use these factors of production to produce goods and services to be sold in the markets for goods and services. Households provide the factors of production (labor, land, and capital) to the firms through the markets for factors of production. The circular flow also illustrates the equality between the income earned from production and the value of goods and services produced.Įdit this Circular Flow Diagram The flow of inputs and outputs It illustrates the interdependence of the “flows,” or activities, that occur in the economy, such as the production of goods and services (or the “output” of the economy) and the income generated from that production. The circular flow diagram is a visual model of the economy that shows how dollars flow through markets among households and firms. The amount of goods and services that are made available is related to the laws of supply and demand. This then directs producers to produce goods and services that individuals will consume. Individuals do this by spending money on what they want. A market economy is one in which individuals influence directly what is produced, marketed, and consumed. The Circular flow describes how a market economy works. View and play PowerPoint presentations online. ![]()
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